Issue #127, January/February 2003
Has Homeownership Been Oversold?
Mounting debt and foreclosures shadow low-income homeowners. But the dream of owning may be crowding out other options.
By Winton Pitcoff
Discussion about homeownership almost always seems to begin with some reference to owning ones own home being a part of The American Dream. Homeownership has come to stand for wealth, stability and civic participation. As such, many view homeownership not merely as something for low-income families to aspire to, but as their ticket out of poverty.
Whatever the collective and individual benefits of homeownership and they are still subject to debate the costs are significant, especially for low-income households whose resources are limited.
One of the most telling statistics of the recent home-buying surge is the accompanying rise in the number of homeowners who are leveraged. Until the 1930s, homebuyers typically paid 40 percent down. In the 1970s and 1980s, 15 percent down payments were common. Today, loans with zero-down payments are readily available, with some mortgage companies even offering mortgages greater than the equity value of the house, providing cash to cover transaction and moving costs. Forty percent of first-time borrowers are putting down 10 percent or less; 16 percent of all borrowers put down 5 percent or less on their mortgages in 2000. Homeowners owe almost $5.7 trillion on mortgages, an increase of 50 percent in just the past four years, which is greater than the federal government or corporate sector debt.
Tax laws have long supported homeownership, most notably through the deductibility of mortgage interest, property taxes and other costs. These deductions total about $100 billion each year, more than three times HUDs current annual budget to support affordable housing. Tax law also allows the exclusion of house price appreciation from capital gains tax and penalty-free withdrawal of money invested in IRAs for first-time homebuyers.
However, this largess is not evenly distributed. Since the Mortgage Interest Deduction and related benefits are available only to those with incomes high enough to itemize deductions, 63 percent of these deductions goes to those in the top one-fifth of the income distribution, and only 18 percent goes to those in the bottom fifth. Similarly, very few low-income households have IRAs to draw from.
Federal programs insure more than a million loans a year to help home buyers with fewer funds available for a down payment, low incomes, or poor credit histories, mostly through the Federal Housing Administration. The secondary mortgage market, primarily Fannie Mae and Freddie Mac, purchases more than half of the loans originated by mortgage lenders, and is required to do a certain amount of business each year that benefits low-income and other underserved markets. But as for-profit, publicly traded companies, these institutions must continually expand their markets. With the upper-income homebuyers market virtually saturated, they have turned their attention to traditionally underserved low-income and minority households.
Regulation of the banking industry, through fair lending laws, the Community Reinvestment Act and the Home Mortgage Disclosure Act, was designed to encourage homeownership by reducing lending discrimination in traditionally underserved markets. Banks, in turn, have aggressively targeted low-income and minority neighborhoods with mortgage and other loan products. While such strategies may well be in response to the regulations, banks have also had to turn to new markets in order to remain profitable.
Mortgages are always good business for banks, says Kathy Tullberg of the Massachusetts Community and Banking Council. Many banks think that low-income homebuyers will eventually move into needing additional loans for cars or education, as well as other banking products, and that these homebuyers will come back to the same bank where they got their mortgage.
Some HUD programs originally designated for rental subsidies have been adapted for homeownership. For example, some Section 8 voucher holders can use their subsidies toward mortgage payments. HOME and Community Development Block Grants now allow funds to be used for grants or loans toward down payments and closing costs. Forty-nine percent of HUDs HOME program funds were used for rental housing in 1995; that number declined to 36 percent by 1997. Many municipalities and states also have programs that provide direct subsidies to first-time and low-income homebuyers.
HUDs national homeownership strategy works to educate the public about its benefits, certifies counseling agencies and includes a small number of direct subsidy programs. While much of the counseling has proven positive, some programs do little more than provide pamphlets, help potential homebuyers meet real estate agents, or assist with cleaning up credit records, leaving many people unprepared for the responsibility of homeownership. (See Shelterforce #112.)
We need to come up with a better way to measure success in homebuyer counseling, says Tullberg. Some say that success should be based on the number of new homebuyers, but it should be based on the appropriateness of the decision for the families.
The Economics of Low-Income Homeownership
As typically presented by homeownership advocates, the formula seems obvious why pay rent when you could build equity? Paying a mortgage can be a form of forced savings. The median wealth of low-income homeowners is more than 12 times that of renters with similar incomes 66 percent of the wealth of all low-income homeowners is accounted for by home equity.
Buying a home with a fixed-rate mortgage also means that some monthly costs will remain the same, as opposed to rents, which usually rise on a regular basis. Many housing proponents argue that if a homeowners wages rise over time, real housing costs as a percentage of income actually decline because the mortgage remains constant, while rent often increases at a rate greater than inflation and wages.
But the formula is not so simple. Transaction and maintenance costs can negate low mortgage payments in some areas. Payments may remain constant over the life of a 30-year mortgage, but insurance, taxes, utilities and other expenses will likely increase. Lower-income families are more likely to borrow against the equity in their home, often at high rates, diminishing any accumulated wealth. Some studies have found that, setting aside the growth in home equity, low-income homeowners actually save less than renters and have fewer funds available for home maintenance or to cushion against income loss. With most or all of their savings in their homes, low-income homeowners are vulnerable to housing market downturns.
And yet the number of low-income homeowners continues to grow. Loans to low-income homebuyers increased by 94 percent between 1993 and 1999. Mortgage volume in 2001 was higher than ever before, in no small part due to record low mortgage rates. More than $2 trillion was borrowed, 59 percent for refinancing. Subprime lending, which targets low-income and high-risk borrowers with high-interest loans, was expected to top $210 billion in 2002. One in five homeowners refinanced their mortgage debt in the past year. As much as 30 percent of them did so to pay down other mostly credit card debt. At the same time, a record number of homeowners have filed for bankruptcy protection.
We cant just get overly obsessed with getting people into homeownership, says Nicolas Retsinas, director of Harvard Universitys Joint Center for Housing Studies. We have to make sure they stay in homeownership. He notes that the biggest revolution in mortgage lending in the past seven years is an automated underwriting system that has expanded lending opportunities for low-income families, but it has yet to be tested in a slow economy. (See Shelterforce #125.)
Such tests appear to be coming. Defaults on loans in 2000 amounted to approximately one million households losing their homes to foreclosure, during the height of an unprecedented economic expansion. As the economy has softened, those numbers have worsened, with delinquencies and foreclosures on all loans rising steadily and reaching an all-time high in the second quarter of 2002. Foreclosures on FHA-backed loans to low-income households have risen the fastest, to a rate of nearly 3 percent, with an additional 12 percent behind in their payments in the second quarter of 2002.
Overall, homeownership has proven to be a good investment, consistently performing better than the safer bond market, although not as well as the more volatile stock market. But these gains are also making homeownership less affordable to low-income households. The median price for a single-family home rose nearly 45 percent during the 1990s, while the poorest 40 percent of Americans had a growth in their income of just 35 percent during that same time. In 2000 alone, tax-adjusted housing costs as a share of income were 8 percent higher than the year before, while real incomes increased only 2 percent. And while the average single-family home has appreciated every year since 1950, there have been many downturns in individual markets.
For those low-income homeowners who keep up with maintenance and mortgage payments, there is no conclusive research about how they fare in building equity. Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, says low-income households tend to purchase homes when the housing cycle is depressed and prices are lower, and as such are often at less risk of losing equity. As the share of loans to low-income households has increased in recent years, he says, more low-income buyers may be vulnerable now.
Low-income homebuyers are limited by the available housing stock and by what they can reasonably afford. Between 1997 and 1999 about a half million new units, or 30 percent of new construction, were affordable to households earning 80 percent or less of Area Median Income. That gain was more than eclipsed by the number of homes that became unaffordable because of market conditions at the time.
In addition, houses affordable to low-income buyers are often older, in need of costly repair and located in depressed, crime-ridden neighborhoods with few jobs.
In Baltimore, where there were more foreclosures than home sales in 2001, deteriorating housing stock is a major problem. Houses with major structural or mechanical problems masked by cosmetic repairs are often sold at inflated prices to low-income families, says Becky Sherblom, executive director, Maryland Center for Community Development. Many of those homes are later foreclosed on or abandoned. (See Shelterforce #113.) At the same time, local CDCs bought abandoned or deteriorating houses and rehabbed them to sell to low-income buyers. Such fix-up projects often cost more than $100,000 in communities where the homes could only be sold for $60,000, leaving the CDCs to fill the gap with CDBG or other subsidy money, Sherblom says.
Homeownership policy is being treated as an economic development strategy and a wealth enhancement policy, but its really gambling, says Anne Shlay, director, Center for Public Policy at Temple University. Low-income people are being encouraged to buy older homes with an unclear shelf life that may or may not appreciate in value.
To limit a discussion of homeownership to economics, however, is to miss the very emotional and social aspects of owning ones own home. People tend not to look at their houses as investments but as a community resource, a place for them to live where their kids can grow up, says Bruce Dorpalen, director of ACORNs housing division. They want to not have to worry about a landlords rules. They want to paint their house how they want, and thats really important. In this context, owning is a status symbol, and renting carries a stigma.
Renting is seen as inferior to owning, rather than simply another form of tenure, says Sheila Crowley, president of the National Low Income Housing Coalition.
Research on the effects of homeownership is relatively new, but as one would expect, most of it finds numerous benefits: adults are better citizens, healthier physically and mentally, and children achieve more and behave better. What is not clear, however, is whether homeownership stimulates these traits or if those most likely to own their homes are already predisposed toward such behavior because of income, wealth, education, age, stability or family composition.
Belsky says that civic engagement has more to do with the tax base and political clout of a community and can be found in communities of any combination of renters and homeowners. Communities under stress usually get organized because they have a reason to, and renters definitely do get involved in their communities, he says.
Other studies find that homeownership can have negative social effects. For example, some homeowners may try to keep lower-income families or minorities out of their communities; others may fail to maintain their home, default on the mortgage and ultimately abandon the house.
Helping move people into homeownership could make sense as part of a broader plan to develop jobs and the economy, and improve neighborhoods and schools. But the idea that these improvements will organically follow an increase in homeownership rates is silly, says Shlay. Schools are in bad shape due to suburbanization and out-migration, not because of low homeownership rates.
A well-developed rental policy could be just as effective as part of a neighborhood economic development plan. The owner-renter distinction is at best a false one, says Shlay. Because tenure is correlated with so many other things, tenure could be an outcome, not a cause.
CDCs and other community-based groups that work on housing issues have also become more focused on homeownership.
Increasing homeownership is great, but it shouldnt come at the expense of other programs, says Carol Wayman, policy director for the National Congress for Community Economic Development. Its not a silver-bullet cure for neighborhood revitalization. We need a balance of housing types that meets the needs of the community. CDCs need help making an intentional determination about what to do, rather than being driven by what money is available.
The money available is no small matter. For example, the Ford Foundation now focuses all of its housing-related grantmaking on homeownership, and no longer supports groups that exclusively focus on rental housing or housing advocacy.
Weve decided to focus on homeownership as a means of building assets, says George McCarthy, a Ford program officer. Homeownership is the main means by which people have been able to gain wealth and its the most viable option for housing low-income people, because the rental market doesnt work and is pushing them out. The challenge is how to make homeownership available for the lowest-income families.
Fords strategy does not include limited-equity opportunities such as community land trusts or mutual housing. Its too hard to move into market rate housing from those kinds of housing, McCarthy says. You dont have enough opportunity to build assets, which is what low-income people need. (See sidebar, "Building Assets with Permanently Affordable Housing.")
But just because homes usually appreciate doesnt mean everyone should own one, says Woody Widrow, project director of the Texas Individual Development Account Network.
Homeownership may not be the best wealth-building strategy, says Widrow. Being a renter and owning a business or saving money to send your kids to college may be a better strategy.
What About Renters?
Thirty-three percent of the households in America are renters, and the American Housing Survey found that among householders age 25 or under, renters make up 81 percent. So if most people are renters for at least some part of their lives, whats happening to the rental housing market with homeownership in the spotlight?
In the euphoria around homeownership, rental housing runs the risk of losing resources when its already grossly underfunded relative to the need of renters, says Belsky. Rental is an important housing option that has the potential to be affordable and stable and produce a lot of benefits.
Widrow notes that most renters who want to move into homeownership cite security of tenure, control of their living conditions and the chance to build equity. What if we had a rental policy that could provide those things for renters? he asks.
But such policy is not likely to come about as long as the public perceives rentals as public housing and subsidized units failed efforts to house the poor. We have to move away from the perception that renters are losers, Widrow says. Until then, people will opt to buy even though it may not be their best housing choice.
For millions of Americans, owning a home is a major step toward financial self-reliance, stability and having a stake in a community. Its hard to find fault in a policy that wants to make these opportunities available to everyone.
Where fault lies, however, is in perpetuating the myth that homeownership is risk-free and appropriate for everyone. With mortgage delinquencies and foreclosures at record levels, particularly among low-income households, millions of poor families might have been better off today had they not chosen to purchase a home. Instead, they have lost savings, are on their way to losing their homes and will soon be forced into a rental market that is tighter and less affordable than ever.
More face the same fate unless the strategy to promote homeownership includes a plan for ongoing support to help families stay in their homes, keep them well-maintained and realize the potential growth in wealth. Homeownership will never be right for everyone, and continual support for the rental market is needed as well. As constructed today, however, with limited research, obvious economic peril to a large population and potential for backlash that could have broad repercussions for the larger economy, the strategy of promoting homeownership for all seems dangerously short-sighted.
Looking upon homeownership as a favored status is not new the U.S. Constitution originally conferred voting privileges upon only landowners. Despite its status as an important component of the American Dream, homeownership has only recently become a barometer for economists and politicians.
For more than 50 years the homeownership rate was around 45 percent, only beginning to climb modestly in the 1940s. The rate declined in the 1980s and early 1990s, but in 1994 President Clinton set a goal to raise the national homeownership rate to 67.5 percent by the end of the decade. That goal was surpassed and has continued to grow since 2000. Today there are 71 million homeowners in the U.S., representing close to 68 percent of households; HUD has set a goal of 70 percent by 2006.
Homeownership is not spread evenly across the population. A greater proportion of white households own their homes than do black and Hispanic households about 75 percent and 49 percent, respectively. An economic divide exists as well, with about 50 percent of the lowest income quintile owning their own home, compared with fully 90 percent of the highest. While minority and low-income homeownership rates are growing more rapidly than those of whites and higher-income households, the gaps are only shrinking marginally.
The State of the Nations Housing 2002, Joint Center for Housing Studies of Harvard University. www.jchs.harvard.edu/publications/markets/Son2002.pdf.