Panel Paper: Is Homeownership Still An Effective Means of Building Wealth for Low-Income and Minority Households? (Was it Ever?)

Friday, November 8, 2013 : 8:40 AM
West End Ballroom E (Washington Marriott)

*Names in bold indicate Presenter

Christopher Herbert, Daniel T. McCue and Rocio Sanchez-Moyano, Harvard University
The notion that homeownership is an effective means of accumulating wealth among low-income and minority households are in many respects the keystone underlying policies to support homeownership. But while faith in homeownership’s financial benefits are widely subscribed to, there have long been critics of the view that owning a home is an effective means to produce wealth. These criticisms have only grown louder in the aftermath of the housing bust, as trillions of dollars in wealth evaporated leaving more than 10 million homeowners owing more than their homes are worth and leading to more than 4 million owners losing their homes to foreclosure. Certainly this experience has made it hard to argue that owning a home is a safe and secure investment.

The goal of this paper is to assess whether homeownership is likely to be an effective means of wealth creation for low-income and minority households in light of what has transpired in housing markets over the last decade. The paper consists of three sections. First, we present a conceptualization of the benefits and risks of homeownership as a financial choice, with a particular eye toward what is known about whether the odds of benefiting financially from homeownership are lower for lower-income and minority homeowners and whether recent experience has altered this calculus. Next, we review the existing literature examining the financial benefits of owning a home, including both studies simulating the returns to owning and renting as well as studies using panel surveys to track actual wealth accumulation through owning and renting. Finally, the main thrust of the paper analyzes data from the Panel Study of Income Dynamics (PSID) covering the period from 1999 through 2009 to assess the extent to which different racial/ethnic and income groups were able to sustain homeownership over this period and how these different tenure trajectories were associated with changes in household net worth over this period.  The preliminary findings suggest that while a majority of households who either started as owners or transitioned into owning over the period were still owners as of 2009, substantial shares (30-40%) of lower-income and minority homeowners had returned to renting by the end of the period. Those who sustained homeownership were found to have had substantial gains in net wealth even during this turbulent period in the housing market, while those that returned to renting essentially lost the wealth that had accumulated during their period of owning. Lower-income and minority households were found to have meaningful and statistically significant gains in net wealth associated with owning, although the gains were somewhat lower for minorities compared to whites.