Low, Moderate Income Families Benefits from Homeownership
Earlier in the year, the Census Bureau reported the share of Americans who own their homes stood at 65%, which was the lowest homeownership rate in almost 18 years.
Part of the many reasons for the decline was tight credit markets and lack of starter home inventory in select markets due to the massive buying by Wall Street investors.
Coming out of the Great Recession, when millions of Americans lost their homes (and the thousands of dollars invested in the purchase and mortgage), there has also been a pervasive questioning of just how good a financial decision it is to own a home.
Those who have been burnt in the past may not want to own a home in the near future, but I would think that homeownership is still a good investment for, as an example, young marrieds with a good household income, especially if they live in a growing city.
Recently, however, I came across a study that looked at a different economic stratum – the low- and moderate-income homebuyer.
The author of the study, Michal Grinstein-Weiss, an associate professor at Washington University and a senior fellow at the Brookings Institution, looked at data from a lending program that provided quality affordable mortgages to qualifying low-income families. When comparing homeowners and renters in that economic bracket, the research found homeowners achieved greater increases in levels of net worth, assets, and non-housing net worth.
“The research shows when ownership is done right, with the right mortgages (30-year-fixed and not subprime), homeownership can be beneficial to even low-income homeowners,” says Grinstein-Weiss. “Economically, in the years of our study, from 2005 to 2008, they did better in terms of financial gains when compared to renters.”
According to Grinstein-Weiss’s study, new homeowners reported an average increase of $15,000 in total net worth as compared with gains of less than $11,000 by renters. In addition, homeowners’ total assets increased by $20,000; for renters, total assets increased by $15,000 over the same period.
“The reason for the better performance by homeowners is unclear, but making mortgage payments often acts as a forced savings mechanism for households,” she explains. “And homeowners benefit from equity in the homes, which increases net worth.”
Grinstein-Weiss stresses these gains were only in circumstances where the low- and moderate-income homebuyer was able to achieve a reasonable mortgage and not the subprime to which a lot of buyers in that economic stratum were steered.
As she noted, from 2006 to the end of 2011, serious delinquency (90 days and/or in foreclosure) for those who got a fixed-rate mortgage was about 5%, but those who got a subprime adjustable-rate mortgage, the delinquency rates rose at times to over 40%.
With a good mortgage, homeownership looks a lot better as an investment – for everyone!