The headline: Elizabeth Warren’s New Housing Proposal Is Actually a Brilliant Plan to Close the Racial Wealth Gap by Mehrsa Baradaran and Darrick Hamilton/Slate October 26, 2018
Elizabeth Warren’s housing proposal, the “American Housing and Economic Mobility Act”, is a massive ($450 billion) program to increase home ownership rates in the US, especially among African-Americans - the primary victims of discriminatory practices prior to the Fair Housing Act of 1968. According to Baradaran and Hamilton, past housing discrimination has led to present-day disparities in education, income and wealth, because it allowed white families to use their home equity to:
“…secure small-business loans, send their children to college, or help their children put together home down payments—an iterative wealth building that was passed on to the next generation. In contrast, black families were left exposed to predatory private finance.”
As documented in Part I of this series, prior federal efforts to reduce the black-white gap in home ownership have basically failed. Despite billions spent, the gap is as large now as it was in 1910. What would be different this time around?
Then there’s the rationale for the program: the idea that home equity is an important source of “iterative wealth building”, especially the use of home equity loans to build businesses and put the kids through college. But does home equity actually play a significant or essential role in financing business or college educations in America?
The last post addressed the use of home equity loans in business financing. Long story short: home equity loans are mostly reserved for established businesses with steady revenue streams, a quick, low-interest financing option for already successful business owners who have other financing options. Home equity loans don’t launch businesses or help businesses in trouble. Business owners are twice as likely to use credit cards or current revenues to finance ongoing needs than tap into their home equity. Bottom line: home equity loans are a footnote in the story of American business financing.
As for the use of home equity to help pay for the kids’ college, the following table says it all:
Source: How America Pays for College 2014: Sallie Mae’s National Study of College Students and Parents https://news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2014FNL.pdf
In other words, a teeny number of parents take out home equity loans to help pay for their children’s college education. It would appear that parental home equity has little to do with the educational accomplishments of the next generation.
Next: Predatory Loans