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Posts Tagged ‘Homeownership’
Eugene Steuerle Doug Wissoker
| Posted: June 4th, 2013
This post originally appeared on The Government We Deserve.
A recent paper by Bayer, Ferreira, and Ross on mortgage delinquencies and foreclosures finds that people of color had greater problems once Recession hit than did many others in roughly equal circumstances, such as income and location, but with different racial backgrounds. We believe this is a useful, though not surprising, finding in ongoing studies of the impact of the Recession on different types of households. Yet we worry about how its results get extrapolated into policy recommendations.
The paper concludes that their research “raises concerns about homeownership as a vehicle for reducing racial wealth disparities”. We believe that one needs to be very careful in extrapolating lessons from the market of the mid-2000s to any market and to policies that would apply over time. Paying off mortgages is the primary means by which the majority of households, particularly low and moderate-income households, save over time. Discouraging such saving could easily add to already unequal distribution of wealth in society.
First, a quick summary of the findings. Combining several sources of data to look at racial differences in delinquent payments and foreclosures for mortgages for purchases and refinances originated between 2004 and 2008, the authors find that black and Hispanic borrowers had substantially higher delinquency and foreclosure rates than whites and Asians, even controlling for differences in circumstances such as the borrower’s credit score, the size of the interest rate spread of the loan, and the identity of the lender. In addition, the authors conclude that the racial gap in delinquent payments and foreclosures peaked for loans originating in 2006. From this, they conclude that people of color entering the market at the peak of the housing boom were particularly vulnerable to adverse economic conditions.
The authors attribute the racial difference found for blacks and Hispanics, even after trying to control for income or other differences, to items they couldn’t measure, including lower wealth and an accompanying lack of a financial cushion. This seems crucial to us and is also consistent with studies that income an incomplete predictor of upward or downward mobility. Work from the Urban Institute (here) shows that wealth differentials by race are much greater than income differentials. These differentials can play out in multiple ways across generations. For instance, wealthier families provide more inheritances and intergenerational transfers that support homebuying and downpayment levels that reduce foreclosure risk.
However, the authors’ concern about homeownership as a vehicle for reducing racial wealth disparities does not follow logically. Evidence here is at best circumstantial. Among other sources of disparate outcomes, consumer groups would point out that these types of findings more than anything highlight the disparate impact of abusive lending at the height of the housing boom.
Portfolio theory requires looking across different types of assets and debts, along with their associated expected returns and risks. Homeownership has risks, but so does renting. In fact, rental rates at times rise faster than the costs of homeownership, and in many parts of the country it has become cheaper to own than rent for those likely to be in a home long enough that transactions costs do not eat away at the ownership returns. Similarly, a household often must choose among debt instruments. Mortgages tend to have lower interest charges than most other forms of debt.
Most vehicles for getting a decent return on investment involve some risk. Saving accounts now paying negative, after-inflation, returns only prove the point in spades. If saving were proportionate to income, for instance, but lower-income individuals invest only in low or negative return assets, then wealth inequality necessarily would grow to be much greater than implied by levels of saving, potentially compounding adverse outcomes over time. Conversely, without discounting lessons from the Great Recession, low-cost, well-structured mortgages continue to be supported by the government (whether through FHA or the GSEs) partly for the very purpose of diversifying risk and effectively spreading wealth ownership.
This study is based on patterns of delinquency and foreclosure rates observed during a limited time period with unusually high foreclosure rates. But, wealth accumulation occurs over a very long time. Thus, even on this paper’s own terms, it’s not clear that reduced rates of homeownership would make low-income households or people of color better off over extended periods. We have found that most homeowners buying a decade or so before the Great Recession came through the longer period in good shape. Our own work also tends to show that black homeownership rates, even after controlling for income, are disproportionately low in both good and bad markets, raising serious questions about whether they are missing out on opportunities available to others.
Regardless of the effect on the difference in wealth disparity by race, homeownership is an effective way for many, though certainly not all, low- and moderate-income households to save. Equity in a home is the primary asset owned by low- and middle-income households, including blacks and Hispanics, by the time of retirement. Paying off a mortgage is the primary mechanism by which these households save, with all the virtues of a more automatic and regular saving vehicle. Reductions in the already low homeownership of people of color would almost certainly exacerbate over time the unequal distribution of wealth.
Toy town photo from Shutterstock
Filed under: Economy |Tags: great recession, Homeownership, homes, race, Urban Institute, wealth 1 Comment »
| Posted: May 15th, 2013
In recent weeks, the growing economic disparities between younger and older Americans, as well as between whites and families of color, received a lot of media coverage. Yesterday, my colleagues Signe-Mary McKernan, Eugene Steuerle, and I told the Treasury Department’s Financial Literacy and Education Commission what we know about these trends and what we think can be done to address them.
The commission is charged with the very important role of educating the public about the complexities of personal finance, and as a part of that, maintaining an informative web site and hotline. We hope the knowledge we shared today can help the commission in its vital mission.
So first things first: how wide are the wealth gaps? Pretty wide.
Let’s start with a broad look across the wealth distribution.
Using data from the Federal Reserve’s Survey of Consumer Finances, we saw that the average American family’s wealth doubled between 1983 and 2010. However we also saw that only the wealthiest households saw anything like that level of growth.
Indeed, while the top 20 percent of wealth holders had an average wealth increase of 120 percent between ’83 and ’10, middle-wealth families only got 13 percent wealthier. On the other end of the distribution, the bottom 20 percent actually saw their relative wealth plummet, from an average debt of $400 in 1983 to an average debt of $17,000 in 2010.
Looking at the data through the prism of race shows a similar gap.
As white people transition from their 30s to their 60s, their average household wealth continually builds. Families of color, on the other hand, don’t have the same increasing trajectory and the disparity gets more pronounced the older people get.
For example, when Americans are in their 30s and 40s, whites have about three-and-a-half times more wealth than African Americans and Hispanics. By the time they reach their early to mid-60s, near the peak of their wealth accumulation, whites have about seven times the wealth of these groups.
The question is why? The answer is that African Americans and Hispanics are less likely to acquire traditional wealth building assets, such as homes and retirement savings.
Getting on a firm path to wealth building can be more difficult for families of color. African American and Hispanic families, for example, are about five times less likely than white families to receive large gifts or inheritances that could be used for major family investments like a down payment on a home or attending college.
The data also show that age is an important factor in wealth accumulation disparities.
Members of the baby boom and silent generations on average acquired a lot more wealth than Americans who were the same age a quarter century ago. For example, the average wealth of today’s Americans aged 56 to 64 is more than twice the amount held by people in the same age range in 1983.
Today’s Americans under 40 haven’t done nearly so well. People in their late-20s to late-30s have 21 percent lower wealth than those in the same age range 25 years ago.
So why do younger Americans have less wealth than prior generations had at their age?
The answers have to do with home equity and student loans.
- Home equity fell by roughly 60 percent between 2007 and 2010 and a lot of younger Americans bought their first home just before the housing crash, when home prices were at their peak, or close to it. So when the housing market crashed, these homebuyers were the hardest hit.
- Ranking only behind mortgage debt, student loans are the second largest source of debt for today’s Americans in their late-20s to late-30s. By way of comparison, student loans were a relatively small component of debt for their counterparts in the 1980s.
And large student loan debts can be especially debilitating by delaying traditional wealth-building behaviors, such as: homeownership, retirement savings, and building a rainy day fund.
So what can be done to help these vulnerable groups?
A great place for the Financial Literacy and Education Commission to focus is on finding innovative ways to prevent young Americans from burying themselves in student loan debts that are likely to prevent them from making wealth-accumulating investments after they finish school.
But teaching financial literacy at younger ages is also critical. The earlier in life a person begins to build wealth, the more time those assets have to compound and become more valuable. So the key is to teach more people to make sound financial decisions earlier in life.
Building a national financial education strategy that permeates throughout our financial and academic institutions can get more people off on the right foot and headed towards a more secure financial future.
Filed under: Economy, Quality of Life |Tags: caroline ratcliffe, changing wealth of americans, eugene steuerle, Homeownership, race, signe-mary mckernan, Urban Institute, wealth 1 Comment »
| Posted: March 30th, 2011
With the sharp drop in home prices have come calls to slow or stop promotion of homeownership, especially among lower-income families. We hear from Richard Florida that homeownership is overrated and from Dean Baker that ideology is behind the initiatives that pushed too many people to take out mortgages. Some (like Peter Wallison) blame much of the economic crisis on government-sponsored homeownership incentives for low-income families. Even a Department of Housing and Urban Development (HUD) official recently told a crowd of academics that we may have pushed low-income homeownership too far.
Commentators like these are fighting the last war. True, when home prices soared relative to rents and to incomes, it was a bad idea to enable people to buy properties beyond their means in the hope that price booms would later bail them—and their creditors—out. But today, home prices and interest rates make home-owning unusually affordable. As recently as 2008, the median income family buying the median home would have had to devote 18 percent of its income to its mortgage payment. Today, comparable payments are 30 percent lower—only 13 percent of income. Homeownership is also far more affordable here than in most other countries. Americans can now lock in monthly housing costs that are low relative to their incomes and to their current rent and douse worries about rent’s inevitable climb over the next 30 years.
So why is housing still in the doldrums? And why is it still a drag on the economic recovery? It’s not because people have lost their preference for ownership; a late 2010 survey found that 84 percent of Americans still believe owning makes more sense than renting. The biggest barrier is apparently financing. Over half of families in the $25-50,000 income range don’t think their credit is good enough to get a mortgage. Banks have apparently done such an about face that they won’t lend even to people trying to buy homes they can easily afford.
One way out is to adopt my homeownership voucher proposal. By phasing out the $7+ billion Low Income Housing Tax Credit (which subsidizes new housing construction), we could help 1 million families reduce their shelter costs, buy homes, increase the demand for owner-occupied housing, save the government at least $10 billion dollars over the next five years , and possibly jumpstart the residential construction industry. Unfortunately, this and like-minded proposals aren’t getting any traction because too many policymakers are obsessed with yesterday’s problems.
Filed under: Assets and debts, Built Environment |Tags: Homeownership, Low Income Housing Tax Credit 4 Comments »