When Mortgages Disappear: Impacts of Credit and Housing Conditions on Land Contract Use

• In Event: Credit Access, Alternative Financing, and Homebuyer Outcomes

Abstract

When homebuyers can’t get mortgages, they sometimes turn to a poorly understood and potentially risky alternative: land contracts. Also known as “contracts for deed” or “land installment contracts”, these arrangements have been a small but notable fixture of the housing market for decades. But only recently has there been enough data available to comprehensively study this financing type.Previous research on land contracts has focused on the risks these arrangements pose to homebuyers. These include higher cost, hidden fees and balloon payments, removal from home in case of payment delinquency, and responsibility for home repairs or property taxes before legally owning the property. However, prior research has not looked at where land contracts are more prevalent and why. One key reason is the lack of consistent, available data on land contract usage, since unlike mortgages, not every state requires public recordation of land contracts.This study uses a novel land contracts database, as well as property records and transactions data from counties in nine states to help shed light on the determinants of land contract prevalence at the county level. The dataset suggests that over 600,000 land contracts have been recorded from 2005 to 2024, though this is likely an undercount due to the lack of recordation requirements in some states. These recorded land contracts made up about 1% of home sales nationwide, and especially common in nine states across the Midwest (Michigan, Ohio, Minnesota, Wisconsin, Iowa, and Indiana), Southwest (Texas and New Mexico), and Pacific Northwest (Washington).Descriptive statistics suggest that land contracts are often used to purchase homes for which mortgages are difficult to obtain, such as low-cost homes, manufactured homes, homes in rural areas, and homes with repair needs. Preliminary cross-sectional regression analysis suggests that lower mortgage shares, higher interest rates, and higher shares of low cost homes are correlated with greater land contract prevalence in home purchases. Magnitudes reveal that 10% decrease in mortgage availability increases land contract use by 0.2 percentage points, or 20% of the baseline land contract prevalence. Panel regressions by county and year additionally find correlations between lower sales volume and higher corporate seller shares and the prevalence of land contracts in home purchases.  Better understanding where land contracts happen can help target potential policy or program solutions to improve homebuyer outcomes. The directional results suggest that gaps in credit and market pressures often help determine where land contracts are used. In line with previous research, the difficulty in securing mortgage financing for lower cost homes and accessible loans for refurbishing homes are also drivers of land contract usage. Making small dollar mortgages and rehab financing more available may reduce the need for land contract usage in many cases.

Author

• Seva Rodnyansky, Pew Charitable Trusts
  Presenting Author