Foreclosing on the American dream? The financial consequences of low-income homeownership

Abstract

Federal programs have consistently encouraged ever-lower-income households to buy homes, despite concerns about the long-term sustainability and desirability of homeownership from the perspective of wealth-building, especially since the recent housing market collapse and the epidemic of mortgage foreclosures. We ask in this paper: can very low-income households build wealth through sustainable homeownership, with the aid of an innovative public program? We answer this question by examining 122 very low-income households who purchased their homes between 1996 and 2007 after completing an extensive asset-building and homeownership education/counseling program offered by the Housing Authority of the City and County of Denver (DHA), called HOP. We analyze our own longitudinal surveys and focus groups, as well as data compiled from administrative agency sources, real estate records, and longitudinal census data from the Neighborhood Change Database and the Piton Foundation's Neighborhood Facts Database. We find that homeownership attained through HOP typically did provide very low-income households with opportunities to build home equity (both absolutely and relative to generic homeowner cohorts in Denver) and net wealth, although this was contingent on time of purchase and ethnicity. Our multivariate analyses revealed that changes in annualized home equity appreciation were associated with the ethnic composition of the neighborhood and age of property. Annualized wealth accumulation was associated with annualized home equity appreciation, being married throughout the tenure of homeownership, and year of home purchase. HOP homebuyers received exceptionally favorable initial mortgage terms and conditions, often enhanced with down-payment assistance from their own DHA escrow account or from local housing and neighborhood development organizations, resulting in a dramatically low rate of default and foreclosure to date. Moreover, HOP homebuyers were not immune to financial stresses, and the continuing lack of wealth for many makes them vulnerable to future interruptions in primary wage earner's employment or health. We discuss the implications for low-income homeownership policy and argue that the goal of expanding homeownership opportunities should not be abandoned.

Keywords:

• assets
• wealth
• homeownership
• defaults
• low-income
• Latino
• Black
• indicators

Notes

¹We note that there recently have been several important reviews of literature related to these questions (e.g., Herbert et al. 2005; Herbert and Belsky 2006; Cortes et al. 2006).

²A total of 264 participants have reached this stage of the HOP. As of 2007, slightly less than half (N = 126) of the participants had graduated from the program and purchased homes; 13 percent had dropped out and purchased homes outside of the program; 28 percent had dropped out and did not purchase homes; and 12 percent were still participating in the program.

³In this study, sources of non-housing wealth include: checking and savings accounts, pensions, stocks, bonds or mutual funds and other family-owned real estate. This restriction reflects the asset data available across all HOP participants.

⁴The various ethnic groups we compared were: Blacks, Latinos, Vietnamese and Whites. Complete results of these analyses are available from the first author upon request.

⁵The HOP Program manager negotiated with local lenders to reduce closing transaction costs, appraisal fees, loan origination fees, and interest rates offered to HOP graduate homebuyers.

⁶The median home value at time of purchase for second homes was $175,000, with a low of $4,300 to a high of $523,000.

⁷The appreciation rate, A, we calculated was based on the formula: A = 4 (V_t – V ₁)/t, where V ₁ is the home value at time (quarter) of purchase, V _t is the value when sold t quarters after purchase (or 2007 third quarter assessed value if not sold). If still residing in their original home, home appreciation was estimated on that home. If the homebuyer purchased a second home after graduation from HOP, home appreciation was estimated on their current residence.

⁸This is virtually identical to the median annual appreciation rate of 5.4 percent found by Stegman, Quercia and Davis (2007) in their study of Community Advantage Program homebuyers, although for a different geographic area and earlier time period. They also found lower appreciation rates for Black homebuyers.

⁹At the time of home purchase, Retrospective Homeowner Survey respondent characteristics were similar to those of the larger sample of HOP homebuyers. Latinos comprised 58 percent of the survey population while Blacks were 33 percent, Vietnamese were 4 percent and Whites were 5 percent. Slightly less that one out of five respondents was an immigrant. The average age of survey respondents at time of purchase was 37.9 years. Approximately two-thirds of the survey participants were single parents. On average, survey respondents had 2.2 children at time of purchase. We restrict our analyses to the 78 non-Habitat for Humanity HOP homebuyers.

¹⁰The observed 38 percent increase in median non-housing debt is substantially higher than the 12 percent increase in such observed by Rohe and Quercia (2003) for the National Reinvestment Program.

¹¹Because of the extremely small sample sizes for Whites and Vietnamese survey respondents, these estimates should be interpreted with caution.

¹²At time of purchase, Whites had accrued the highest median total debt ($156,675), followed by Blacks ($151,243), Latinos ($142,206), and Vietnamese ($100,256). By the time of the Retrospective Homeowner Survey, median total debt was highest for Blacks ($157,340), followed by Latinos ($135,993), Vietnamese ($135,000) and White ($133,496) homebuyers.

¹³Increased indebtedness for items potentially considered investments (e.g., automobiles, business loans, and education loans) were reported by 37, 2 and 20 percent of respondents, respectively as sources of incremental consumer debt amounts.

¹⁴This is virtually identical to the 5.3 percent cumulative default rate observed by Carr et al. (2008) for HOME/American Dream Down-payment Program homebuyers over the somewhat-shorter 2001–2008 period. Note the wide range in foreclosure rates associated with other programs, however; cf. Locke et al. (2008) and Newburger (2006).

¹⁵These neighborhoods are characterized by higher fractions of minority populations and a higher incidence of subprime loans.

¹⁶Several studies have found that financial education resulted in low-income households saving more (Jacob, Hudson and Bush 2000; Caskey 2001; Clancy, Grinstein-Weiss and Schreiner 2001). In particular, promising findings have emerged from the pilot study of using matched savings into Individual Development Accounts as a means of simultaneously encouraging savings and homeownership (Grinstein-Weiss et al. 2008).

¹⁷These recommendations are consistent with those proposed in a 2008 special report by the Center for Enterprise Development.