Benefits of Homeownership Linked to Good Lending – Study

by devteam June 12th, 2013 | Share

Contrary to the increasingly prevalent argument that the benefits of homeownershiprnhave been overemphasized, a new study by finds that it is still arngood investment for low- and moderate-income households. But therernis a caveat: The lending process must be done right, throughrnresponsible mortgage practices. </p

MichalrnGrinstein-Weiss and a team of researchers looked at a group ofrnhomeowners who got vanilla loans at a time where everyone else inrnsimilar circumstances were pushed into the subprime market. Thesernvanilla borrowers subsequently reported higher net worth than arncomparison group of participants whornremained renters. Their findings are outlined in an article titledrnIs Homeownership Still arnSound Financial Move?</spanpublished in the journal Housing and Policy Debate.</p

Thernresearch team used data from the Community Advantage Program (CAP) torncompare a group of low- and moderate-income homebuyers with rentersrnin the same income bracket. CAP provides traditional 30-yearrnfixed-rate mortgages with predictable terms and sound underwriting tornborrowers who would otherwise qualify only for subprime products. The team compared the experiences of these homebuyers and theirrnrenting counterparts on total net worth, total assets, total debts,rntotal liquid assets, and total non-housing net worth. </p

Thernteam’s findings suggest that homeownership coupled with sustainablernmortgages helped participants achieve greater increases in most ofrnthese variables than was reached by the renters. </p

Over the 3-year study periodrn(2005-2008), the new homeowners reported an average increase ofrn$15,000 in total net worth while renters reported gains of less thanrn$11,000. The changes broke down to an increase in the new homeowners’rntotal assets of $20,000 while their total debt grew by only $5,000.rnFor the renters, total assets increased by one-quarter less ($15,000)rnand total debt increased by about the same as the homeowner grouprn($4,500). The homeowner group also showed greater gains in totalrnliquid assets ($3,660) and total non-housing net worth ($3,036) thanrnthe amount of increases reported by renters.</p<pGrinstein-Weiss says the study "is not offering homeownership as arnpanacea for poverty or suggesting homeownership is arn’one-size-fits-all’ solution to increasing household savings.” Rather the researchers view their results a way to inform policies tornpromote homeownership as a strategy for such households to buildrnwealth. “Our findings do not argue that all homeownership isrnbeneficial,” the author says, “but rather that lower-incomernhomeowners who have access to mortgages that are carefullyrnunderwritten with responsible terms, including low upfront costs andrnlow interest rates – or what we like to call ‘responsiblernmortgages’ – can experience increased financial security andrnindependence.</p

Grinstein-Weiss says thernfindings are particularly noteworthy because data was gathered during the Great Recession when the housing market downturn had therngreatest effect on low- and moderate-income households. Yet thosernvery households in this study experienced increases in net worth.rn”Maintaining a financial balance during the Great Recession wouldrnhave been noteworthy in itself, but the substantial increases in netrnworth among this group of new homebuyers are particularly remarkable.rnIndeed, this study suggests that homeownership can be a pathway tornfinancial security.”</p

The potentially problematic factor of ongoing price appreciation during the first two years of the study was not addressed, nor was the fact that values were still on the way down in 2008.  Still, proponents of homeownership benefits espouse the notion that a home is the one investment inrnwhich you can sleep, eat, and raise a family. Whereas paying rentrnguarantees a place to sleep, paying a monthly mortgage eliminates arnportion of the principal of the loan, reducing debt, and potentiallyrnincreasing net worth. A March 2013 survey conducted by JP MorganrnChase found that the dream of homeownership lives on; 87% of itsrnrespondents still hope to own a home one day.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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