Overcoming the Wealth Barrier
And yet, we do know how to overcome these barriers and make ownership safe and affordable for lower income families.
A 2009 report by the U.S. Census Bureau estimated that 7 percent of current renters could safely afford to buy homes using standard mortgage products. They found that subsidizing mortgage rates by as much as 3 percentage points had virtually no effect on the number of renter families that could afford ownership and that offering loans with no downpayment requirements would increase that number by only 2 percentage points (to 9 percent). Providing purchase subsidies, on the other hand, had a more dramatic result. A subsidy of $10,000 (whether from a family member or a public program) would increase the number of renters who could qualify for ownership by 12 percentage points (to 19 percent).
In light of this research, it is surprising to note that while we spend billions of dollars annually on programs to expand homeownership, only a very small fraction is currently invested in purchase subsidy programs. This is so even though purchase subsidies are currently the dominant strategy for supporting affordable rental housing.
Programs that provide purchase assistance to bring the costs of homeownership down to an affordable level not only make ownership possible for lower-income buyers, they make it safer and more sustainable. Instead of borrowing more than they can afford to repay, qualified buyers borrow what their incomes can support, with the gap being covered not by a relative, but by a public or nonprofit agency.
Many believe, however, that these programs are simply too expensive to offer a realistic alternative to mortgage product innovation as a path to expanded homeownership.
A growing number of affordable homeownership programs address this concern by preserving long-term affordability so that a one-time public investment can make homeownership possible for one lower income family after another. These programs offer targeted assistance to buyers who would not be able to buy without such help and they preserve the affordability of assisted units so that many more households can ultimately benefit from the same initial investment. The growing stock of affordable homes in these programs offers a sustainable way to grow the overall rate of low-income and minority homeownership.
These programs achieve this result by limiting the level of price appreciation available to owners. In exchange for significant public support at the time of purchase, they require owners to pass that benefit along to future lower income buyers by reselling at an affordable price or repaying the subsidy along with a share of any market price appreciation. Participating homeowners do build assets, but in an expanding market they earn less than unrestricted market-rate homeowners.
Critics of this approach understandably question whether limiting a lower income buyer’s potential price appreciation defeats one of the key purposes of homeownership. If appreciation is limited, can affordable homeownership still offer a path out of generational asset poverty? If assisted homeowners can’t earn the same home equity gains that other owners enjoy, won’t they be trapped in affordable homes?
Policymakers face what sometimes seems like a no-win decision: either they make grants that offer wealth-building but only to a lucky few or they preserve affordability but sacrifice the goal of reducing asset inequality.