Home equity lending, credit constraints and small business in the US

Abstract

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House prices, home equity and entrepreneurship: Evidence from U.S. census micro data

“…This limited response in the SBO is consistent with house price growth increasing the attractiveness of home equity as a part of business …nancing, but not unlocking an exceptionally large pool of otherwise constrained entrepreneurs through the collateral channel. Indeed, contrasting this SBO result with Lastrapes et al (2021) shows an important nuance between our contemporaneous studies. These authors document how Texas business owners following the lending reform went from practically no use of home equity loans in 1992 (0.3% in Texas vs. 5.1% nationally) to comparable rates in 2007 (6.6% in Texas vs. 6.8% nationally) once the reform took root.…”

“…Abdallah and Lastrapes (2012) show these reforms led to sustained increases of 2%-3% or more in retail sales for Texas, with an underlying heterogeneity in spending responses consistent with unlocking of housing collateral. Zevelev (2021) connects these reforms to a 4% increase in Texas home values, and Lastrapes et al (2021) study the impact on business dynamism. We use this reform to analyze the role of rising home equity for reducing credit constraints and to assess how the entry linked to this reform in Texas resembled and di¤ered from the broader correlation of house price growth and entrepreneurship.…”

“…See alsoChaney, Sraer and Thesmar (2012).4 For example,Kerr and Nanda (2011),Åstebro and Thompson (2011),Åstebro et al (2014),Levine and Rubinstein (2017), andGuzman and Stern (2020).5 Classic and recent work includesEvans and Jovanovic (1989), Holtz-Eakin, Joulfaian and Rosen (1994), Rajan and Zingales (1998),Cooley and Quadrini (2001),Gentry and Hubbard (2004),Cabral and Mata (2003),Cagetti and De Nardi (2006),Buera, Kaboski and Shin (2011),Chatterji and Seamens (2012), andBarrot (2016) Krishnan, Nandy and Puri (2015),Tsoutsoura (2015),Nguyen (2019),. andGreenstone, Mas and Nguyen (2020) are recent contributions to a parallel literature on local lending conditions and existing …rm and small business access to credit(Petersen and Rajan, 1994, 1995;Paravisini, 2008).6 Our work most closely connects toLastrapes et al (2021), who also use Census Bureau data in a contemporaneous investigation. By combining two rounds of con…dential data on the Survey of Business Owners, they document the stark rise in home equity loan use in Texas by business owners from 1992 to 2007.…”

“…We look for evidence of 'excess'entrepreneurship in Texas following the reform compared to its region, potentially stemming from the unlocked home equity gains that relaxed …nancing constraints for potential Texas entrepreneurs that were not binding in neighboring states. In a contemporaneous paper, Lastrapes et al (2021) document that business owners in Texas began using home equity as part of their …nancing strategy after 1998, growing from 0.3% in 1992 to 6.6% in 2007. Thus, knowing home equity lending for businesses took root after 1998, this study turns to the question of whether there was a material surge of entry indicative of relieved …nancing constraints.…”

“…Although small, this collateral e¤ect is precisely estimated due to our micro-data and the house price surges that often totaled to 50% or more during the early 2000s. Using a di¤erent set of techniques and data, Lastrapes et al (2021) also estimate a modest growth in entry in Texas.…”