In her depth exploration of the current housing market, Nancy Cook of The Atlantic recently asked whether home ownership is still the best way for Americans to build wealth. Her answer: yes, but less so than in previous decades. “Even if the rates of home ownership do return to their pre-bubble levels,” Cook explains, “experts and advocates acknowledge that home buying remains an imperfect crutch to boost wealth.”
Above and beyond building wealth through equity, home ownership affords many tangible benefits for buyers. Home ownership is still an important marker of stability and success in the American imagination. Homes for purchase tend to be located in better school districts and in better proximity to services than homes in rental neighborhoods. And the equity factor is still one of the best ways of building wealth for many Americans during this time of wage stagnation and pension shrinkage. As Brett Theodos, a senior research associate at the Urban Institute explains, “It is a forced-saving mechanism, and if you don’t have to think about saving, it goes better.”
This fact is part of why economists and politicos are worried that our housing market has failed to recover fully. Credit lending standards are so tight that anyone with the means but inadequately perfect credit still can’t get a home loan. The tight economy has stagnated the creation of new households, as people prefer to bunk with family and roommates to weather financial distress. First-time buyers, minorities, and Millennials are very under-represented in the current housing market. The impact of this situation on America’s economic future, and on the long-term financial wealth of those under-represented parties, remains to be seen but doesn’t look terribly good.
The Federal Housing Administration recently announced a plan to cut mortgage-insurance premiums, in a bid to nudge first-time buyers into the market. The plan will save homeowners about $900 annually on their mortgage payments. But even if home ownership rates return to pre-2008 levels, home buying is still only a means to prop up the acquisition of personal wealth. The 2000s saw record levels of Americans refinance their homes, pulling money out and using their house as a savings account, which has made housing less of a certain option for building long-term wealth. According to Theodos, the issue isn’t about home ownership as a perfect strategy, but rather, “What other vehicles are out there to help people build wealth over the course of their lifetimes and over generations? Private savings isn’t doing it.”
In order to recapture the full potential of home ownership to build wealth, Sarah Edelman of the Center for American Progress says that policymakers should take a two-plank approach to stimulating home ownership. “The majority of first-time home buyers may not be able to come up with a 20 percent down payment,” says Edelman, “for the future health of the housing market, we must make sure families who can afford to buy a home do.” New home ownership policies must acknowledge the value of home ownership as a way to build equity, and promote ways to help first-time buyers and renters save money for a down-payment on a home.
This would mean that private firms, civil agencies, and the federal government must experiment with new approaches. Creditworthiness should be measured in a much broader fashion than the current paradigm allows, programs that encourage automatic savings depots from earned income must be developed, and programs to help debt-ridden homeowners modify their mortgages as the housing market valuation changes should be a top priority. Equity-sharing programs for homes and apartments may also be a potential solution.
Until these issues are productively resolved, the housing market will not recover its full value, or its potential for wealth-building for the American people.