One of the first principles of financial management is diversification: don’t put all your money into a single stock, bond, or piggybank. Yet for most of the 20th century, U.S. families have been encouraged to build wealth through an inherently undiversified asset: their homes. The Great Recession brought a painful reminder that homes are not guaranteed to increase in value. In no place was this more apparent than Las Vegas, a region particularly hard hit by the foreclosure crisis. In a new report, I examine the current state of housing affordability and homeownership in the Las Vegas metropolitan area and discuss what these trends imply for financial security and wealth-building.
There’s black jack and poker — and the real estate deal
Homeownership can create wealth in two very different ways. Viewed as a long-term investment, buyers build equity gradually through a “forced savings” mechanism: every month’s mortgage payment includes a bit of additional principle. Some buyers try to become wealthy quickly by timing real estate cycles. If they buy property in a location that is experiencing rapid price appreciation, they can recoup the investment and cash out quickly. The first approach requires patience, the second requires luck.
Across the U.S., homeowners and investors who were lucky enough to purchase real estate during the early 2000s and sell before 2007 did very well. That is particularly true for Las Vegas (Figure 1). Homeowners in Las Vegas who bought near the market peak in 2006 were not so lucky. Even those who did not lose their homes to foreclosure have lost wealth: many homes bought in the mid-2000s still have lower values today than at the time of purchase.
Losing wealth when home prices decline has serious consequences for households’ financial well-being. Families who expected that home equity would help finance their children’s education or supplement their retirement income will now have to scale back their plans or find other resources. The risk of relying on home values is compounded because housing prices are positively correlated with local labor markets: prices rise or fall together with local employment.
Roll the dice, hope for an affordable apartment
The foreclosure crisis didn’t just hurt those who owned their homes; it also made life more difficult for Las Vegas’ renters. Homeowners displaced by foreclosures still needed a place to live, and formed a new cohort of renter households competing with existing renters for homes. As a result of strong demand, the cost of renting a home in Las Vegas has increased relative to incomes since 2000, with little improvement, even during the Great Recession (Figure 2).
Housing takes up a larger share of monthly income for low- and moderate-income households (Figure 3). Both renters and homeowners in the poorest quintile (annual household income under $25,000) spend more than 60 percent of their income on housing costs, well over HUD’s benchmark for being considered severely cost burdened. Moderate income households – the second quintile, with incomes $25,000-43,500 – spend just over 30 percent of their income on housing. These patterns are very similar to those observed nationally.
The homeownership deck is stacked against Black and Latino households
When renter households devote more of their monthly paycheck towards housing costs, they have less money to spend on other necessities, or to save for the future. If renters can’t accumulate enough funds for a downpayment, they are less likely to become homeowners. Las Vegas has seen a sharper decline in homeownership rates than the US overall (top panel of Figure 3).
Underlying the decline in homeownership for the metro area overall are widely varying trends by race (bottom panel of Figure 3). White and Asian homeownership rates have been consistently about 20 percentage points higher than Latino households and nearly 30 percentage points higher than Black households. Homeownership rates among whites and Asians rose slightly from 2000 to 2010 and are nearly back to their pre-recession levels, while Black and Latino homeownership rates continue to decline. Because Latinos are the fastest growing population group in Las Vegas, the decline in Latino homeownership figures significantly in the metro area’s overall rate.
The racial gaps in homeownership cannot be entirely explained by differences in income (Figure 4). Among moderate income households, only 20 percent of Black families and 35 percent of Latino families own their homes, compared to just over half of white and Asian families. The gaps are somewhat smaller for middle- and upper-middle-income families.
In Las Vegas and nationally, lower homeownership rates among Blacks and Latinos reflect a variety of contributing factors. Decades of racially discriminatory housing policies have created wealth gaps that hinder saving for down payments. Systematic targeting of subprime mortgages and predatory auto loans to Black and Latino communities also contribute to lower credit scores.
Neither policymakers nor families should place all their chips on homeownership.
The two defining features of the Las Vegas housing market – high price volatility and low homeownership rates – raise questions about whether homeownership should be the primary wealth-building strategy in the metro area. Home values are not guaranteed to increase – housing is at least as risky an asset class as the stock market. Maintaining a home also requires continual investments of time and money, and may limit the household’s ability to relocate for better work opportunities. When the local job market softens, renters can more easily move to another city in search of another job.
Two avenues for policy change could improve the financial well-being of Las Vegas households.
Increase the stability and quality of renting. Homeowners with fixed rate mortgages are able to lock in consistent monthly housing costs over long periods of time, while renters typically cannot predict their rent beyond a one-year lease. Promoting the use of multi-year leases, which are already widely used in commercial real estate, could change that. Local governments can offer other tenant protections, like consistently enforcing housing quality standards – an issue of particular salience where single-family homes are a substantial share of the rental market.
Encourage alternate savings channels for both renters and owners. Too many U.S. families have almost no rainy day savings. Unexpected events such as having one’s working hours cut or a health emergency can push both owners and renters into financial distress and unstable housing. Savings vehicles such as individual development accounts would help, especially when designed with nudges to imitate the “forced savings” mechanism of homeownership. Large employers could offer low-cost financial planning assistance to their workers as part of standard benefits.
Asset-building outside of homeownership is especially important for population groups that become homeowners at lower rates, tend to enter homeownership later in the market cycle, and may face other barriers to purchasing homes. Household financial security has serious implications for individual households, the Las Vegas region, and the nation’s overall economic health.
Thanks to Tiffany Ford for outstanding research assistance.