Access, Assets, and Poverty:
The Role of Financial Services Among Low- and Moderate-Income Households
Homeownership: America’s Dream
Raphael W. Bostic and KwanOk Lee
School of Policy, Planning, and Development
University of Southern California
Introduction
Presentation Overview
- Lower-Income Homeownership: Where We Are and How We Got
There
- Emerging Issues for Lower-Income Homeownership
- Benefits of Successful Low-Income Homeownership
- Costs of Failed Low-Income Homeownership – Foreclosure
- Policy Implications
Lower-Income HO: Where We Are
Homeownership Rates by Income Quintile, 1994-2006
Overall
Year
Quintile
2
3
50.2 64.9
4
5
76.8 86.8
1994
62.4
1
34.2
2000
65.6
38.4
54.7
69.3
79.8 87.9
2006
68.8
38.0
56.7
71.9
83.9 91.1
5.1
4.9
10.3
12.2
-1.1
11.1
9.0
3.7
12.9
6.8
3.8
10.8
3.9
5.1
9.2
Percent change
1994-2000
2000-2006
1994-2006
Data Source: Current Population Survey, March Supplements for 1994, 2000, and 2006
1.3
3.6
5.0
Lower-Income HO: Who Are The New Owners
Homeowner demographics for bottom two income quintiles, 1994 and 2006
Income Quintile 1
Income Quintile 2
1994
1994
2006
2006
Household
characteristics
Household income
(mean)
9,539
13,679
23,333
34,115
Urban location
In MSA
58.7
67.4
63.6
70.9
Marital status
Single
12.5
19.6
11.7
16.8
Race/ethnicity
Black head
12.6
15.3
8.4
11.5
Hispanic head
11.0
15.3
10.7
14.9
2,990
4,420
4,421
6,778
Observations
Data Source: Current Population Survey, March Supplements for 1994 and 2006
Drivers of Lower-Income HO Gain
Causes of the Growth in Low-Income Homeownership
Demographic and
economic forces
- Increased educational
attainment
- Increased wealth
Market innovations
- Credit scoring
- Rise of subprime market
Government policy
- Regulations
- CRA, GSE Act, HMDA,
FHA
- Programs and policies
- CDFIs, IDAs
A Model of HO
Asset Building
Success of
Homeownership
Benefits
Demographic
and Economic
Forces
Market
Innovations
Government
Policy
Positive Psychological
Outcomes of
Individual Families
Positive Spillover
Effects on
Surrounding
Neighborhoods
Growth of
Homeownership
Exposure to
Foreclosure
Failure of
Homeownership
Costs
Financial Loss and
Psychological Stress
of Families Caused by
Foreclosure
Negative Impacts of
the Concentration of
Foreclosure on
Neighborhoods
Does HO Make Sense? Issues for Lower-Income Households
Greater Cost Burdens
- More than 20% of lower-income first-time homebuyers have serious cost burdens
- Low-income homebuyers may face greater risks in terms of costly home repairs, lower
rates of appreciation and lower-quality neighborhood amenities
More Instrument Risk/Need for Sophistication
- Introduction of many new loan products leaves those not financially savvy at risk
- Lower-income people with a limited access to education tend to be financially less
sophisticated
- Predatory lenders often takes advantage of borrowers that have a lack of financial
sophistication
Higher Neighborhood Risk
Lower mobility, residential isolation, and segregation can trap lower-income homeowners
in distressed areas
- Concentration of mortgage defaults and foreclosed properties in neighborhoods can bring
negative impacts on neighborhood property values and increase crime
-
Lower-Income HO: There Are Risks
Causes of the Growth in Low-Income Homeownership
Demographic and economic
forces
Market innovations
Government policy
- Regulations
- CRA, GSEA, HMDA, FHA
- Programs and policies
- CDFIs, IDAs
- Increased educational
attainment
- Increased wealth
- Credit scoring
- Rise of subprime market
- More female-headed
households
- Wealth declined 2001-2004
- Concentration in low-income, - Unintended consequences
minority nbhds
- Limiting competition
- Predatory lending
- Subprime performance
Benefits of Successful Low-Income Homeownership
Asset Building
Success of LowIncome
Homeownership
Demographic
and Economic
Forces
Market
Innovations
Benefits
Positive Psychological
Outcomes of
Individual Families
Positive Spillover
Effects on
Surrounding
Neighborhoods
Growth of LowIncome
Homeownership
Exposure to
Foreclosure
Government
Policy
Failure of LowIncome
Homeownership
Increasing Cost
Burdens
Instrument Risk and
Lack of Financial
Sophistication
Costs
Financial Loss and
Psychological Stress
of Families Caused by
Foreclosure
Negative Impacts of
the Concentration of
Foreclosure on
Neighborhoods
Quantifying Benefits: A Simulation
Simulation Elements – Dimensional partitions
Created stylized households
Varied age of head, size of family, and relative
income
Used SCF to determine consumption, savings
levels
Considered neighborhood characteristics
Allowed for pricing of house values
Introduced varied financing schemes
Different downpayment amounts, mortgage
instruments
House price appreciation scenarios
Scenario 1 (Case)
Neighborhood’
Scenario 2 (Dataquick)
Lower-income
18.33%
4.74%
Middle-income
22.48%
2.53%
High-income
30.86%
0.67%
Benefits Simulation: Example of Results
Neighborhood income level
Cumulative gain
After year 1
After year 10
High
Middle
Low
0% Down,30 Yr FRM
($8,480)
($2,130)
$220
5% Down,30 Yr FRM
($3,741)
$238
$1,425
10% Down,30 Yr FRM
$998
$2,606
$2,585
20% Down,30 Yr FRM
$10,477
$7,343
$4,907
0% Down,5/1 ARMs
($7,424)
($1,471)
$309
5% Down,5/1 ARMs
($2,738)
$864
$1,468
10% Down,5/1 ARMs
$1,949
$3,200
$2,626
20% Down,5/1 ARMs
$11,322
$7,520
$4,943
0% Down,2/28 ARMs
($9,551)
($2,801)
($307)
5% Down,2/28 ARMs
($4,759)
($399)
$1,339
10% Down,2/28 ARMs
$34
$2,003
$2,546
20% Down,2/28 ARMs
$9,620
$6,807
$4,872
Average
($191)
$1,982
$2,244
Average
$16,231
$30,146
$23,372
Benefits Simulation: The Punchline
What Simulation Results Tell
- Affordability is critical: ownership only makes financial sense if the housing prices are
low enough
- Initial wealth matters: downpayment determines extent of the wealth gain
- Savings buffers are important
- Homeownership is generally preferred to renting
- Innovation in the market can work either way
Benefits Simulation: Downpayment Impact
5/1 ARMs, Using Case Appreciation Rate
(2Persons HH)
$100,000
CumulativeTotal Wealth
$80,000
30YR FRM, Using Case Appreciation Rate
(2Persons HH)
$100,000
0% Downpayment
$40,000
5% Downpayment
10% Downpayment
$20,000
20% downpayment
$0
1
3
5
7
10
($20,000)
$80,000
($40,000)
$60,000
Year
0% Downpayment
$40,000
5% Downpayment
2/28 ARMs, Using Case Appreciation Rate
(2Persons HH)
10% Downpayment
$20,000
20% downpayment
$0
1
3
5
7
$100,000
10
($20,000)
$80,000
($40,000)
Year
CumulativeTotal Wealth
CumulativeTotal Wealth
$60,000
$60,000
0% Downpayment
$40,000
5% Downpayment
10% Downpayment
$20,000
20% downpayment
$0
1
3
5
($20,000)
($40,000)
Year
7
10
Benefits Simulation: Owning v. Renting
Low-Income Neighborhood, 0% Down, 2/28 ARMs
Using Case Appreciation Rate
Low-Income Neighborhood, 0% Down, 5/1 ARMs
Using Case Appreciation Rate
$4,500
$2,000
CumulativeTotal Wealth
$3,500
$3,000
$2,500
Owner
$2,000
Renter
$1,500
$1,000
$1,500
$1,000
Owner
Renter
$500
$0
$500
1
2
3
4
5
6
$0
1
2
3
4
5
6
7
8
9
10
($500)
Year
Year
M iddle-Income Neighborhood, 5% Down, 2/28 ARMs
Using Case Appreciation Rate
$12,000
$10,000
CumulativeTotal Wealth
CumulativeTotal Wealth
$4,000
$8,000
$6,000
Owner
Renter
$4,000
$2,000
$0
1
2
3
4
5
6
($2,000)
Year
7
8
9
10
7
8
9
10
Costs of Failed Low-Income Homeownership
Asset Building
Success of LowIncome
Homeownership
Demographic
and Economic
Forces
Market
Innovations
Benefits
Positive Psychological
Outcomes of
Individual Families
Positive Spillover
Effects on
Surrounding
Neighborhoods
Growth of LowIncome
Homeownership
Exposure to
Foreclosure
Government
Policy
Failure of LowIncome
Homeownership
Increasing Cost
Burdens
Instrument Risk and
Lack of Financial
Sophistication
Costs
Financial Loss and
Psychological Stress
of Families Caused by
Foreclosure
Negative Impacts of
the Concentration of
Foreclosure on
Neighborhoods
Costs Simulation: Example Results
Cumulative gains
After year 1
After year 10
0% Down,30 Yr FRM
5% Down,30 Yr FRM
10% Down,30 Yr FRM
20% Down,30 Yr FRM
0% Down,5/1 ARMs
5% Down,5/1 ARMs
10% Down,5/1 ARMs
20% Down,5/1 ARMs
0% Down,2/28 ARMs
5% Down,2/28 ARMs
10% Down,2/28 ARMs
20% Down,2/28 ARMs
Average
0% Down,30 Yr FRM
5% Down,30 Yr FRM
10% Down,30 Yr FRM
20% Down,30 Yr FRM
0% Down,5/1 ARMs
5% Down,5/1 ARMs
10% Down,5/1 ARMs
20% Down,5/1 ARMs
0% Down,2/28 ARMs
5% Down,2/28 ARMs
10% Down,2/28 ARMs
20% Down,2/28 ARMs
Average
Neighborhood income level
High
Middle
Low
($9,345)
($2,495)
$22
($8,319)
($1,694)
$381
($7,293)
($893)
$695
($5,241)
$710
$1,324
($8,372)
($1,871)
$93
($7,395)
($1,101)
$406
($6,417)
($331)
$719
($4,462)
$859
$1,345
($10,339)
($3,133)
($486)
($9,263)
($2,300)
$312
($8,188)
($1,467)
$672
($6,036)
$199
$1,303
($7,556)
($1,126)
$566
($74,302)
($8,502)
$1,637
($64,044)
($2,910)
$4,812
($53,786)
$1,934
$7,942
($33,270)
$9,129
$14,203
($64,617)
($4,857)
$1,790
($54,888)
($267)
$4,753
($45,160)
$3,636
$7,716
($25,703)
$8,970
$13,642
($84,356)
($13,488)
$331
($73,613)
($6,857)
$4,075
($62,870)
($1,129)
$7,219
($41,384)
$7,772
$13,418
($56,499)
($548)
$6,795
Costs Simulation: The Punchline
What Simulation Results Tell
- Homeownership produces wealth losses or small gains for most ownership scenarios if
low appreciation rates
- Renting generally produces greater wealth increases than owning
- Homeownership is not a very effective wealth-building strategy in this context, risks from
trigger events remain high
- Consequently, lower-income homeownership can be coupled with elevated risk of
delinquency, default, foreclosure and the loss of a home – the failure of homeownership.
Costs: Foreclosure – Realizing the Risks
Foreclosure Rate Trend (Jun06-May07)
0.0035
0.0030
Foreclosure Rate
0.0025
0.0020
0.0015
0.0010
0.0005
0.0000
Jun-06
Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07
Month-Year
Per Capita
Per Ow ner Occupied Housing
Costs: Foreclosures Are Concentrated
Foreclosure Rate Per Owner Occupied Housing
0.2500
Foreclosure Rate
0.2000
0.1500
0.1000
0.0500
0.0000
CO
FL
CA
MI
OK
WA
NC
State
Top 10 Zips
MSA
State
PA
MD
MS
Foreclosure Rate Regression Results
Independent Variable
Income
Characteristics
Poverty rate
0.079 (3.78 **)
ln(Median household income)
0.000 (-0.48)
Income dummies
No
0.067 (3.13 **)
Yes
D1 (120% or more of MSA Median HHY)
-0.004 (-2.22 **)
D2 (80-100% of MSA Median HH Income)
-0.001 (-0.40)
D3 (less than 80% of MSA Median HHY)
0.006 (2.10 **)
Housing rate occupied by black
0.028 (4.47 **)
0.027 (4.24 **)
Housing rate occupied by Latino
-0.006 (-0.97)
-0.007 (-1.03)
Vacancy rate
-0.008 (-0.88)
-0.010 (-1.00)
Homeownership rate
0.008 (0.79)
-0.010 (1.04)
Multi-family housing rate
-0.007 (-1.42)
-0.009 (-1.70 *)
Housing rate built before 1970
-0.011 (-3.06 **)
-0.013 (-3.42 **)
ln(Median house value)
-0.054 (-9.58 **)
-0.053 (-9.46 **)
ln(Median owner cost with mortgage)
0.088 (8.49 **)
0.087 (8.82 **)
ln(Median owner cost without mortgage)
-0.004 (-1.02)
-0.004 (-0.96)
Ownership rate with high cost burdens
0.406 (9.25 **)
0.388 (8.84 **)
House price appreciation rate
-0.003 (-1.49)
-0.003 (-1.43)
Economic
Unemployment rate
-0.048 (-1.46)
-0.042 (-1.28)
Geographic
State dummies
Yes
Yes
Number of Observations
3,097
3,097
R2
20.38 %
20.71 %
Demographic
Characteristics
Housing
Characteristics
Homeownership
Characteristics
Data Source: Foreclosure data (2006-2007) by ZIP code from Realty Trac, Other data from Census 2000, *significant at 10% level, **significant at 10 % level
Summary of Findings
What Does Our Study Show?
- Homeownership can generate clear benefits for wealth-building
- Not always true – degree to which it makes sense varies with affordability,
downpayment, housing appreciation, financial sophistication
- Current environment (low appreciation rates, heavy use of alternative mortgage
instruments) carries considerable risks
Policy Implications
How Do We Shield Lower-Income HOs?
- Increase their financial sophistication
- Ease affordability burdens
- Reduce mortgage costs by restructuring the mortgage finance market
- Modify the regulatory environment to limit abuses that reduce wealth
Policy Proposals
Possible Policy Actions
- Promote and expand homeownership counseling and savings education programs
- Promote production of affordable ownership housing
- Permit GSE involvement in the subprime and alternative mortgage markets
- Push for adoption of anti-predatory lending laws