Homeownership doesn’t increase wealth by itself. Home equity increases wealth - that is, the market value of one’s home minus what one still owes on the mortgage. Home equity increases over time as the mortgage is paid down. Unless it isn’t paid down, because one has borrowed against the equity to pay bills. If we want low-income households to build wealth through homeownership, the challenge is less to make it easier for these households to buy homes than to make sure they build equity through sustained homeownership.
The Department of Housing and Urban Development (HUD) was established in 1965 as part of the war on poverty.
The Fair Housing Act (FHA) of 1968 sought to address housing inequities by making it unlawful for sellers, landlords, or financial institutions to refuse to rent, sell, or provide financing for a dwelling based on factors other than an individual’s financial resources.
The FHA program is managed by HUD. In line with HUD’s mission to increase homeownership, FHA loans help borrowers who have little cash saved up for a down payment.
Per George Romney, appointed HUD Director in 1969: “FHA personnel were encouraged to begin to do what they had not been doing; namely, to put families into homeownership situations in the central city in areas that had previously been redlined.”
HUD/FHA programs have provided subsidies for downpayments, low-interest loans, and tax credits to help low-income households achieve the American Dream of homeownership.
So far, so good. Now for the bad.
FHA programs have “a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times.” - John Wake “50 Years of Failure – U.S. Affordable Housing Programs and the Black Home Ownership Rate”
Per a 2006 HUD report, minorities at all income levels were 22-39% more likely to leave home ownership than whites and close to half of low-income buyers did not sustain homeownership for more than five years.
Per a 2008 HUD report, African-American households suffered a much higher foreclosure rate than white households. The HUD report concluded that the elevated level of foreclosure rate for the African American borrowers was no longer evident once other characteristics were controlled for. These other characteristics included low levels of home equity, high mortgage loan-to-income ratios, single marital status, and more dependents in household.
To make matters worse, neighborhood foreclosures are contagious, propelling “residents who are financially able to out-migrate…leading to a density of vacant, neglected, and abandoned properties, heightening the appearance of neighborhood deterioration, driving up crime, and increasing the likelihood of racial [segregation].” - Hall, Crowder & Spring. (2015) “Neighborhood Foreclosures, Racial/Ethnic Transitions, and Residential Segregation”
Adding insult to injury, the black-white homeownership and wealth gap has barely budged from pre-1968 levels - John Wake “50 Years of Failure – U.S. Affordable Housing Programs and the Black Home Ownership Rate”
Thanks for nothing, HUD.
HUD has hurt a lot of families by making it easier for them to buy homes they were ill-equipped to keep. Such households don’t build wealth and often have their credit ruined for years, making it more difficult to buy a home later - perhaps when they would have been better situated to buy than when they were “helped”.
None of this is to say that increasing homeownership is not an important policy goal. But it’s got to be done right.
“You can also get cash and use it for just about anything with a home equity loan (also known as a second mortgage). However, it’s wise to put that money toward a long-term investment in your future—paying your current expenses with a home equity loan is risky.” - The Balance, What is Home Equity?
“African Americans are 78 percent more likely than whites to report the importance of borrowing against the value of their home as a major reason to pursue homeownership…The pattern is similarly strong when Latinos…”- McCabe (2018). “Why Buy a Home? Race, Ethnicity, and Homeownership Preferences in the United States”
“During the U.S. mortgage borrowing boom of 1998-2005…households who have more children, are younger, are nonwhite, and are financially illiterate about portfolio risk were more likely to have “actively” withdrawn housing equity via cash-out mortgage refinancing or borrowing against traditional second mortgages.” Duca and Kumar (2014). "Financial literacy and mortgage equity withdrawals."
“From 1977 to 2013, the average FHA default rate had increased to twelve percent— forty times higher than the rate over its first 20 years. This default rate is inconsistent with claims that the FHA has remained focused on sustainability.” - Lee and Tracy Long-Term (December 2018) Outcomes of FHA First-Time Homebuyers
“Among those with similar credit scores and loan attributes, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. …[these] borrowers being less able to manage the economic distress created by economic downturns, even after controlling for differential exposure to loans with risky terms. ” Bayer, Ferreira, and Ross. (2016) The Vulnerability of Minority Homeowners in the Housing Boom and Bust
“These results call into question the idea of encouraging homeownership as a general mechanism for reducing racial disparities in wealth. To the extent that increases in homeownership are driven by the entry of especially vulnerable households into the owner occupied market, such a push may backfire, leaving vulnerable households in a difficult financial situation and adversely affecting their wealth and credit-worthiness for years.” Bayer, Ferreira, and Ross. (2016) The Vulnerability of Minority Homeowners in the Housing Boom and Bust
Bayer, Patrick, Fernando Ferreira, and Stephen L. Ross. 2016. "The Vulnerability of Minority Homeowners in the Housing Boom and Bust." American Economic Journal: Economic Policy, 8 (1): 1-27. https://www.nber.org/papers/w19020.pdf
Duca, J. V. and A. Kumar (2014). "Financial literacy and mortgage equity withdrawals." Journal of Urban Economics 80: 62-75. https://doi.org/10.1016/j.jue.2013.08.003
Hall, M., Crowder, K., & Spring, A. (2015). Neighborhood Foreclosures, Racial/Ethnic Transitions, and Residential Segregation. American sociological review, 80(3), 526–549. doi: 10.1177/0003122415581334
Herbert CE and Belsky ES. 2006. The Homeownership Experience of Low-Income and Minority Families: A Review and Synthesis of the Literature. Washington, DC: U.S. Department of Housing and Urban Development, Office of Policy Development and Research, available at: http://www.huduser.org/Publications/PDF/hisp_homeown9.pdf
Immergluck, Dan and Smith, Geoff (2006) The Impact of Single-family Mortgage Foreclosures on Neighborhood Crime, Housing Studies, 21:6, 851-866, DOI: 10.1080/02673030600917743
Lee, Donghoon and Tracy, Joseph, Long-Term Outcomes of FHA First-Time Homebuyers (December 2018). Economic Policy Review, Vol. 24, No. 3, 2018. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3298997
McCabe, B. J. (2018). Why Buy a Home? Race, Ethnicity, and Homeownership Preferences in the United States. Sociology of Race and Ethnicity, 4(4), 452–472. https://doi.org/10.1177/2332649217753648
U.S. Department of Housing and Urban Development Rates of Foreclosure in Home and ADDI Programs Office of Policy Development and Research November 2008 https://www.huduser.gov/portal/publications/addi1.pdf