The Costs and Benefits of Homeownership

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The Costs and Benefits of Homeownership

• Shannon Van Zandt
• Center for Urban and Regional Studies
• University of North Carolina at Chapel Hill

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Claims about HomeownershipFrom the National
Homeownership Strategy (1995)

• Homeownership is a commitment to strengthening
  families and good citizenship. Homeownership
  enables people to have greater control and
  exercise more responsibility over their living
  environment.
• Homeownership is a commitment to community.
  Homeownership helps stabilize neighborhoods and
  strengthen communities. It creates important
  local and individual incentives for maintaining
  and improving private property and public spaces.

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Claims about HomeownershipFrom the National
Homeownership Strategy (1995)

• Homeownership is a commitment to personal
  financial security. Through homeownership a
  family acquires a place to live and raise
  children and invests in an asset that can grow in
  value and provide the capital needed to start a
  small business, finance college tuition, and
  generate financial security for retirement.

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Questions

• What evidence is there for these claims?
• Are they based on conventional wisdom or sound
  empirical research?
• How about the costs of homeownership?
• Is there a downside that is ignored in the rush
  to support homeownership?

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Organization
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Homeownership and Satisfaction
Social impacts on individuals

• Theory
• Buying a home achieves a major life goal.
• Homeowners find satisfaction in both maintaining
  and improving their homes.
• Greater wealth associated with ownership
  increases satisfaction.
• Evidence
• Most research indicates that buying a home does
  lead to greater life and residential
  satisfaction.
• The reasons for the effect are unclear.
• Different types of ownership may lead to
  differing levels of satisfaction.

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Homeownership and Health
Social impacts on individuals

• Theory
• The social status and personal freedom associated
  with homeownership lead to higher levels of
  self-esteem and perceived control over life.
• Homeowners have additional assets that can be
  used to pay for improved health care.
• Compared to renters, homeowners have additional
  security of tenure, which may result in a less
  stressful life.
• Evidence
• Available research is methodologically weak
  and/or inconclusive.
• Little is known about the impact of mortgage
  default on psychological outcomes. Lower-income
  or less successful homeowners may suffer from
  greater stress.

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HO and Neighborhood Stability
Social impacts on community

• Theory
• Homeowners tend to be higher-income, family
  households with older, more educated household
  heads who anticipate staying in a home for a
  longer period of time.
• Owners have a greater economic interest in
  maintaining their homes and environments.
• Decreased mobility may trap owners in undesirable
  or deteriorating neighborhoods.
• Evidence
• Higher rates of ownership lead to an increase in
  property values.
• Lower homeownership rates are associated with an
  increase in social problems, including
  unemployment and poverty rates.
• Low-income, black, female-headed and older
  households are less likely to move out of
  distressed neighborhoods if they are home owners.

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HO and Civic Involvement
Social impacts on community

• Theory
• Owners see civic involvement as a means of
  protecting their investment.
• Owners have stronger attachments to neighborhood
  and community.
• Owners may discriminate against various social
  groups including racial and ethnic minorities and
  renters.
• Evidence
• Evidence is strong and consistent that homeowners
  are more likely to participate in voluntary
  organizations and engage in local political
  activity.
• The relationship may be spurious i.e., people
  who are likely to buy homes may be predisposed to
  be politically active.

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HO and Youth Behavior
Social impacts on community

• Theory
• Owner parents are more stable and thus provide a
  better environment for emotional and cognitive
  development of children.
• Homeowners create a neighborhood environment that
  is better able to monitor childrens behavior.
• Evidence
• Research does not take into account all
  alternative explanations, but
• Children of home owners are more likely to stay
  in school and less likely to become parents as
  teenagers.
• Younger children of home owners demonstrate
  higher scores on reading and math tests.

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Conclusions Social

• Considerable evidence suggests that homeowners
  are more likely
• To be satisfied with their homes and
  neighborhoods,
• To participate in voluntary and political
  activities, and
• To stay in their homes longer periods of time.
• Most studies do not adequately account for the
  self-selection of households to owner and renter
  occupancy, making causal attribution difficult.
• Very little research is available about the
  negative social impacts of mortgage default or
  being trapped in deteriorating neighborhoods.

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HO and Housing Quality
Economic impacts on individuals

• Theory Owners live in bigger units of higher
  quality and with more amenities.
• Evidence
• Owners enjoy an average of two more rooms and 600
  more square feet than renters.
• Owners are twice as likely to have a separate
  living or dining room three times as likely to
  have a working fireplace twice as likely to have
  a washer and dryer and twice as likely to have a
  garage or carport.
• Renters are twice as likely to suffer from
  rodents holes in walls, ceilings and floors
  wiring deficiencies and water leaks.
• Renters are three times more likely to live in
  crowded conditionsmore than one person per room.

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HO and Housing Costs
Economic impacts on individuals

• Conventional Wisdom Monthly housing costs are
  lower for renters than for home owners.
• Evidence
• Owners pay less per square foot than do renters.
• Owners pay a lower percentage of their income for
  housing costs than do renters.
• Housing costs-to-income ratios diminish over
  time, but these savings may be eaten up with
  maintenance or transaction costs.
• Lower-income buyers are more likely to purchase
  older homes that require more maintenance, thus
  may not experience the same benefits as wealthier
  owners.
• Owners enjoy substantial tax benefits through the
  mortgage interest deduction, but not all
  lower-income owners are able to take advantage of
  it.

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HO and Wealth Accumulation
Economic impacts on individuals

• Home owners accumulate assets through
  homeownership in two ways
• Home owners reap the full return (or loss)
  associated with house price appreciation.
• As their mortgage is amortized through repayment,
  a household builds equitythe difference between
  the value of the home and what is owed on it.

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HO and Portfolio Wealth
Economic impacts on individuals

• Wisdom The portfolio allocation literature
  recommends that no more than nine percent of
  household wealth be housing equity.
• Evidence
• Housing equity represents roughly 45 percent of
  the average home owners net worth.
• Minority households have even higher percentages
  of net worth in housing equity.
• As household wealth increases, the portfolio
  share of housing decreases.

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Housing as an Investment
Economic impacts on individuals

• Evidence
• Housing carries less risk than the stock market
  but is more subject to extreme events, which
  amplifies relative risk.
• The return on housing is related to the amount
  that is owed on a home. High leverage decreases
  the liquidity of housing assets.
• Housing generally appreciates over time, but can
  vary (sometimes dramatically) by region and
  neighborhood.

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HO and Access to Credit
Economic impacts on individuals

• Theory Home owners have better access to both
  secured and unsecured credit.
• Evidence
• Most HELs are used to finance home improvements
  or consumption.
• Increased use of credit increases the households
  debt burden.
• Increased debt burden has been linked to
  long-term foreclosure rates.

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HO and House Price Appreciation
Economic impacts on community

• Theory House prices are affected by the prices
  of nearby housing (spatial correlation)
• Evidence
• Falling house prices are often linked to local or
  regional recessions.
• More expensive homes have higher rates of price
  appreciation during inflation-driven economic
  expansions while lower-priced houses have higher
  appreciation rates during employment- and
  income-driven expansions.
• Annual appreciation rates are far more volatile
  over time in low-income and high minority tracts
  and price volatility tends to follow
  macroeconomic swings.

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HO and Job Mobility
Economic impacts on community

• Theory Local and regional economies use labor
  mobility to adjust.
• Evidence
• Homeownership is a significant deterrent to job
  mobility.
• The more highly-leveraged the household, the more
  difficult it is to move.
• This decreased mobility exacerbates spatial
  mismatch between workers and jobs as well as its
  concomitant problems.

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Conclusions Economic

• Homeowners live in larger, higher quality
  dwellings.
• They enjoy a better stream of housing services,
  with costs that usually fall over time, and stand
  to gain considerable financial returns if they
  remain owners for a long period of time.
• Strong evidence suggests that the average
  homeowner accumulates a significant portion of
  wealth in the form of housing equity.
• Wealthy homeowners also accumulate more
  non-housing wealth than renters, suggesting that
  they save more.

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Conclusions Economic

• Homeownership offers much better financial
  security for wealthy owners than for low- and
  moderate-income and minority owners because
  lower-income households
• Accumulate lower than average non-housing
  savings.
• Hold more housing that is optimal in portfolio
  wealth, exposing them to higher risk.
• Borrow more against their equity and more
  expensively than higher-income households,
  eroding wealth accumulated through house price
  appreciation.
• Have more volatile and generally lower price
  appreciation than in middle- and upper-income
  tracts.

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The Downside of HO

• Those who buy homes in less desirable
  neighborhoods or in housing markets that
  experience depreciation may not realize the
  economic or the social benefits of homeownership.
  
• Some homeowners may desire to move, but find
  themselves stuck in homes that they cannot sell.
  
• Home owners may have difficulty keeping up with
  their mortgage payments. Delinquency and default
  may lead to long-term financial and emotional or
  physical problems.

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Policy Implications

• Enough evidence exists for positive associations
  between homeownership and social and economic
  outcomes to justify public policies that support
  and encourage homeownership.
• Lower-income households may be susceptible to
  negative impacts from home ownership, yet these
  are the very households to whom homeownership
  promotion is targeted. Caution should be
  exercised.