Homeownership has always had a central place in the American Dream. But, the recent housing crisis and Great Recession that brought historic drops in home values across most of the country have many questioning whether homeownership is still a sound financial move for American households. Even with housing markets making modest recoveries, some real estate experts are warning of an imminent oversupply of housing as the baby-boom generation begins to retire and downsize from large suburban homes, thus reversing the current recovery and sending homeowners “underwater” again. Some policy critics have declared that the benefits of homeownership have been overemphasized, leading to poorly conceived programs promoting homeownership among low- and moderate-income homebuyers who would be better advised to remain lifelong renters.
A team and I recently looked at this ongoing question around the financial benefits of owning versus renting. Our study found that homeownership can be a good investment for low- and moderate-income households when the lending process is “done right” through responsible mortgage practices. Homeowners who participated in the study got vanilla loans at a time when everyone else at their level got pushed into subprime, and subsequently reported higher net worth than the comparison group of participants who remained renters. Published in the journal Housing Policy Debate, this research provides critical evidence for the policy discussion on programs designed to promote homeownership as a means of social and economic development for low- and moderate-income families.
Our team conducted the study using data from the Community Advantage Program (CAP) to compare a group of low- and moderate-income homebuyers with a group of renters in the same income brackets. CAP provides traditional, 30-year, fixed-rate loans with predictable terms and sound underwriting to low- and-moderate-income borrowers who otherwise would qualify only for subprime mortgages. The program is a partnership between the Center for Community Capital at the University of North Carolina at Chapel Hill (a leading research and policy organization), Self-Help (a leading Community Development Financial Institution), the Ford Foundation, and Fannie Mae.
The research team-Clinton Key and Shenyang Guo, PhD, of the University of North Carolina; Yeong Hun Yeo, PhD, of Jeonbuk National University in the Republic of Korea; and Krista Holub of the Center for Social Development-compared the experiences of low- and moderate-income homebuyers and their renting counterparts on total net worth, total assets, total debts, total liquid assets, and total non-housing net worth. The research findings suggest that homeownership coupled with sustainable mortgages helped participants achieve greater increases in their levels of net worth, assets, and non-housing net worth than the levels achieved by the group of renters. The data provide evidence that low- and moderate-income households build wealth and gain financial security through homeownership when given access to traditional loan products.
Over the 3-year study period (2005-2008), the new homeowners reported an average increase of $15,000 in total net worth as compared with gains of less than $11,000 reported by the renters. In addition, the new homeowners’ total assets increased by $20,000 while their total debt grew by only $5,000. For the renters, total assets increased but by one-quarter less ($15,000) and total debt increased by about the same as the homeowner group ($4,500). The homeowner group also showed greater gains in total liquid assets ($3,660) and total non-housing net worth ($3,036) than the amount of increases reported by renters.
This study is not offering homeownership as a panacea for poverty or suggesting homeownership is a “one-size-fits-all” solution to increasing household savings. Rather, the researchers see this study as important evidence to inform policies that promote homeownership as a strategy for helping low- and moderate-income households build wealth. Our findings do not argue that all homeownership is beneficial, but rather that lower-income homeowners who have access to mortgages that are carefully underwritten with responsible terms, including low upfront costs and low interest rates – or what we like to call ‘responsible mortgages’ – can experience increased financial security and independence.
These research findings are particularly noteworthy because the study data were gathered during the Great Recession. Although the housing market downturn had the greatest effect on low- and moderate-income households, those were the very households in this study that experienced increases in net worth. Maintaining a financial balance during the Great Recession would have been noteworthy in itself, but the substantial increases in net worth among this group of new homebuyers are particularly remarkable. Indeed, this study suggests that homeownership can be a pathway to financial security.
A home is the one investment in which you can sleep, eat, and raise a family. Whereas paying rent guarantees a place to sleep, paying a monthly mortgage eliminates a portion of the principal of the loan, reducing debt, and potentially increasing net worth.
The findings from this study are even more important in light of findings from a March 2013 survey conducted by JP Morgan Chase, which found that 87% of respondents still dream of owning their own home one day. The American Dream of homeownership lives on; therefore, policy makers must ensure that policy is put in place to ensure ethical, responsible lending practices that will allow homebuyers to not only live their dream but also achieve real and lasting financial security.