Wednesday, August 22, 2007

Low-Income Homeownership Boom Goes Bust

Question: Is homeownership a social blessing that should be encouraged with subsidies and public policy?

Answer: According to politicians and the voters who elect them, the answer has been "Yes."

For example, we've had tax subsidies, lending subsidies and a concerted set of government policies to move low-income people out of rental units and into homeownership. The government's goal was to lift the homeownership rate from 64.2% to 67.5% of households, and that goal was achieved. It all sounds good to help low-income groups achieve the "American dream of homeownerhsip," but we are now in a "payback" period for misguided policies that encouraged low-income renters with low-quality credit to buy homes with low down payments and sub-prime loans, often with adjustable rates.

And have higher rates of homeownership actually benefited low-income groups? Apparently not as much as we once thought. From today's
Wall Street Journal article "Payback":

Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.

Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% -- less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job.

And the mortgage-interest deduction, won't turn a house into a paying proposition for those with little income to shelter.

Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.


4 Comments:

At 8/22/2007 1:12 PM, Anonymous Anonymous said...

Dr. Perry’s rhetoric is flawed. He compares the return from the homes to T-bills but like the old saying goes, “you can not live in a bond.” The alternative to homeownership, renting, would have cost those families tens of thousands during any period.
The other arguments may be valid but the text would have a greater meaning if it compared the economic costs of renting to the costs of owning and arrived at the conclusion that renting would come on top given the circumstances.

 
At 8/22/2007 2:57 PM, Anonymous Anonymous said...

1:12 - Very good comment. I do agree that the cost of renting is completely left out of this argument. I own some rental houses where my total monthly payment on a 100% financed loan, including taxes and insurance is $600 and I can rent it out for $850. Certainly, the low income individuals would face higher interest rates but it is unlikely that renting saves any money over purchasing the home and they would still be forking out 50% of their income in housing expenses. The only advantage would be that they would have more mobility for job hunting purposes.

 
At 8/22/2007 7:08 PM, Anonymous NumberWise said...

I agree with the two anonymous comments, but I think that it would take much more than a blog entry to explore the renting vs. owning issue, especially comparing various economic groups.

To speak very generally, I see quite a difference between low-income and middle-income homeownership. There are many factors in low-income housing that don't affect better housing as much. A few of these include declining neighborhoods, mortgage insurance costs, often high repair bills, and long mortgage terms, in addition to those you cited. I've worked with some of these subsidized home owners, and it's a very different set of circumstances from the usual mortgaged home.

 
At 8/23/2007 4:56 AM, Blogger juandos said...

No, Dr. Perry's so called, "rhetoric" is NOT flawed but A @ 1:12 p.m. reasoning is...

BTW who says, "you can not live in a bond"?

I rent and wouldn't dream of owning a home...

For some bizzare reason you leave out the expense of home ownership...

Why is that?

I'm not merely talking about the substantial capital investment involved but the personal time of the home owner in maintainence and the cost of upkeep...

So it seems that what you are saying is that your time, your irretrievable time spent on mowing the lawn, fixing plumbing, painting, standing in line to pay for items at Lowes or Home Depot and all the other mundane but incredibly irritating jobs is worth absolutley nothing...

Its time you'll never get back and rarely pays off unless your personal time, the time you have allotted to you in life's lottery is totally worthless...

 

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