Homeownership as a Means of Reducing Wealth Disparities

COAUTHORED WITH DOUG WISSOKER

A recent paper by Bayer, Ferreira, and Ross on mortgage delinquencies and foreclosures finds that people of color had greater problems once Recession hit than did many others in roughly equal circumstances, such as income and location, but with different racial backgrounds.  We believe this is a useful, though not surprising, finding in ongoing studies of the impact of the Recession on different types of households.  Yet we worry about how its results get extrapolated into policy recommendations.

The paper concludes that their research “raises concerns about homeownership as a vehicle for reducing racial wealth disparities”.  We believe that one needs to be very careful in extrapolating lessons from the market of the mid-2000s to any market and to policies that would apply over time.  Paying off mortgages is the primary means by which the majority of households, particularly low and moderate-income households, save over time.  Discouraging such saving could easily add to already unequal distribution of wealth in society.

First, a quick summary of the findings.  Combining several sources of data to look at racial differences in delinquent payments and foreclosures for mortgages for purchases and refinances originated between 2004 and 2008, the authors find that black and Hispanic borrowers had substantially higher delinquency and foreclosure rates than whites and Asians, even controlling for differences in circumstances such as the borrower’s credit score, the size of the interest rate spread of the loan, and the identity of the lender.  In addition, the authors conclude that the racial gap in delinquent payments and foreclosures peaked for loans originating in 2006.  From this, they conclude that people of color entering the market at the peak of the housing boom were particularly vulnerable to adverse economic conditions.

The authors attribute the racial difference found for blacks and Hispanics, even after trying to control for income or other differences, to items they couldn’t measure, including lower wealth and an accompanying lack of a financial cushion.  This seems crucial to us and is also consistent with studies that income an incomplete predictor of upward or downward mobility.  Work from the Urban Institute (here) shows that wealth differentials by race are much greater than income differentials.  These differentials can play out in multiple ways across generations.  For instance, wealthier families provide more inheritances and intergenerational transfers that support homebuying and downpayment levels that reduce foreclosure risk.

However, the authors’ concern about homeownership as a vehicle for reducing racial wealth disparities does not follow logically.  Evidence here is at best circumstantial.  Among other sources of disparate outcomes, consumer groups would point out that these types of findings more than anything highlight the disparate impact of abusive lending at the height of the housing boom.

Portfolio theory requires looking across different types of assets and debts, along with their associated expected returns and risks.  Homeownership has risks, but so does renting.  In fact, rental rates at times rise faster than the costs of homeownership, and in many parts of the country it has become cheaper to own than rent for those likely to be in a home long enough that transactions costs do not eat away at the ownership returns.  Similarly, a household often must choose among debt instruments.  Mortgages tend to have lower interest charges than most other forms of debt.

Most vehicles for getting a decent return on investment involve some risk.  Saving accounts now paying negative, after-inflation, returns only prove the point in spades. If saving were proportionate to income, for instance, but lower-income individuals invest only in low or negative return assets, then wealth inequality necessarily would grow to be much greater than implied by levels of saving, potentially compounding adverse outcomes over time.  Conversely, without discounting lessons from the Great Recession, low-cost, well-structured mortgages continue to be supported by the government (whether through FHA or the GSEs) partly for the very purpose of diversifying risk and effectively spreading wealth ownership.

This study is based on patterns of delinquency and foreclosure rates observed during a limited time period with unusually high foreclosure rates.  But, wealth accumulation occurs over a very long time.  Thus, even on this paper’s own terms, it’s not clear that reduced rates of homeownership would make low-income households or people of color better off over extended periods.  We have found that most homeowners buying a decade or so before the Great Recession came through the longer period in good shape.  Our own work also tends to show that black homeownership rates, even after controlling for income, are disproportionately low in both good and bad markets, raising serious questions about whether they are missing out on opportunities available to others.

Regardless of the effect on the difference in wealth disparity by race, homeownership is an effective way for many, though certainly not all, low- and moderate-income households to save.  Equity in a home is the primary asset owned by low- and middle-income households, including blacks and Hispanics, by the time of retirement.  Paying off a mortgage is the primary mechanism by which these households save, with all the virtues of a more automatic and regular saving vehicle.  Reductions in the already low homeownership of people of color would almost certainly exacerbate over time the unequal distribution of wealth.