In Defense of Low-Income Homeownership

by Dollars and Sense

For many years progressive community-development folks worked hard to make homeownership accessible to low-income households. This effort was based in significant part on their view that homeownership represented a critical opportunity for low-income households to build assets and move into the middle class.

Now a new skepticism about low-income homeownership has emerged—including in these pages (see Howard Karger's The Homeownership Myth in D&S #270).

But before we let the subprime crisis completely wash this whole effort away, we should revisit the argument for low-income homeownership and examine what is left of it after the subprime debacle and how to move forward.

There are a number of avenues by which a higher rate of homeownership may benefit neighborhoods and communities as aggregates. But for the purposes of this discussion, let's leave those community-level benefits aside.

At the level of individual households, the case for expanding low-income homeownership opportunities that fair-lending and community development activists began making perhaps 30 years ago took as its starting point the fact that all households must pay for a place to live. Many low-income households spend just as much on rent as their homebuyer neighbors spend on mortgage payments (or at least this was true prior to the recent housing bubble, which pushed house prices up much more than rents on average). For these households, what holds them back from homeownership is not the ability to make the monthly payments, but rather (1) enough savings to make a down payment; and (2) a lender willing to extend them credit.

Households that have these two advantages and so can buy a home reap big benefits. Rent is like money down the drain, whereas mortgage payments build equity—i.e., you're paying yourself. As a result, over time renters actually pay far more to keep a square foot of roof over their heads than homeowners do. This is one of the biggest ways in which life is more expensive for the poor than for the nonpoor.

If you can make mortgages available, then, along with either no/low down payment terms or the opportunity to borrow the down payment, then low-income households can jump the hurdle.

This was the case for expanding low-income homeownership opportunities. So what went wrong? Why does it appear that so many low-income homebuyers in the most recent period were not able to keep their homes and reap the benefits of homeownership?

One factor is no doubt the often-unpredictable ancillary costs of homeownership. What do you do when the water heater breaks? If you don't have the savings to suddenly put out $1,000 for a new one, you're in trouble.

The variability of income over time is probably another factor. Income fluctuations that a middle-income household can manage can put a lower-income household into foreclosure. And income fluctuations have been getting larger for most Americans in recent decades, a fact that is obscured if you look only at population snapshots or at individuals' average earnings over time.

But the factor that seems likely to have been the thousand-pound gorilla here is that the private financial services industry was never going to provide credit to low-income earners on the same terms as it did to middle- and high-income earners. Twenty and thirty years ago, did progressive low-income homeownership advocates take this little wrinkle into account? I don't know. But in any case, this fact turned out to invalidate the side-by-side comparison of a renter and a homebuyer paying out the same monthly sum for housing. Instead of getting the same 30-year fixed-rate mortgages at prime (i.e., relatively low) interest rates that middle-class white households had been getting en masse in the decades since World War II, the new lower-income and more often nonwhite entrants to the home purchase market got newfangled, deceptive, designed-to-fail mortgage products.

The private financial services industry is not the only way credit can be provided, however. Perhaps the solution is public mortgage lending—a quasi-governmental institution that does not merely expand liquidity via private for-profit lenders as Fannie Mae and Freddie Mac were designed to do, but actually makes direct loans to low-income homebuyers. The microlending phenomenon has demonstrated that low-income borrowers are not inherently worse credit risks than high-income borrowers. They just need a chance: access to credit on equitable terms.

Labels: financial crisis, homeownership, predatory lending, subprime crisis

 

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10/24/2008 11:38:00 AM