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Expanding homeownership will strengthen our nation’s families and communities, strengthen our economy, and expand this country’s great middle class. Rekindling the dream of homeownership for America’s working families can prepare our nation to embrace the rich possibilities of the twenty-first century. —President Bill Clinton, 1995 Homeownership in low-income neighborhoods has positive personal and social benefits. It provides residents with an incentive to maintain both their own property and the local neighborhood. Recent research also suggests that homeownership is associated with “life satisfaction” (Scanlon, 1999). Still, these externalities and “internalities” are not costless. A house is not only a dwelling; it is an investment asset. As such it has risk and return characteristics that should affect the purchase decision. This chapter examines the investment value of U.S. housing over the past twenty years. The results suggest that the capital appreciation of housing over the twenty-year period from 1980 through 1999 was substantially less than the return to U.S. stocks, bonds, and mortgagebacked securities over the same period. Although the comparison with stocks and bonds over the past two decades is somewhat unfair, given how well financial assets performed relative to historical norms, housing did not even fair well when compared with inflation. Returns to home investment exceeded inflation 257 Policy Implications of Portfolio Choice in Underserved Mortgage Markets william n. goetzmann and matthew spiegel 9 ISBN 08157-0614-6 file04 ch7-9 pp201-274.qxd 7/26/2002 2:34 PM Page 257 in most states, but only by modest amounts over the period. Not only have returns been historically low, but, when price dynamics are properly accounted for, the risk is significant. Many homeowners in the United States over the past twenty years experienced extended periods in which their home equity was negative . This evidence alone is a compelling reason to reconsider the stated fundamental goal of expanding homeownership. Despite its relatively poor performance as an investment vehicle, housing has a private consumption value that may induce people to hold it, and the positive externalities of owner-occupied housing are a strong inducement to encourage it. Thus there are clear policy implications of the evidence we present in this chapter. First, the government should be cautious about encouraging wholesale home purchases, especially by the most financially vulnerable in society. It should provide information about risk and return beyond simply helpful guidelines for accessing mortgage credit. Second, it should develop institutions and markets that allow homeowners to insure against local areawide housing price risk. Proposals for a housing futures market by Case, Shiller, and Weiss (1993) would appear quite beneficial, given the long-term risks of homeownership. Finally, the government should reconsider a tax policy that economically favors renting rather than buying by low-income families. The role of government-sponsored agencies (GSEs) in encouraging lowincome homeownership has been much debated, particularly with respect to their role in fulfilling the mandate of the Community Reinvestment Act. Of particular concern is the development of special programs to encourage higher loan-to-value (LTV) ratios in lower-income neighborhoods. Although increasing LTV ratios relax the wealth constraints affecting tenure choice, they also add substantially to the risk of default (see Gyourko, Linneman, and Wachter, 1998; Gyourko and Linneman, 1996; Haurin, Hendershott, and Wachter, 1996). In addition, higher LTV ratios create conditions for increasing the volatility of housing prices (see Stein, 1995; Lamont and Stein, 1999) and regional recessions (see Caplin, Freeman, and Tracy, 1997). Besides household and macroeconomic risks associated with increased leverage in low-income neighborhoods, we argue that increasing LTVs in underserved mortgage markets may encourage gentrification. Higher LTV ratios substitute down payments for higher interest rates. However, the mortgage interest deduction provides a greater benefit to higher-income families. Thus allowing high LTV ratio loans in low-income areas may simply encourage higher-income individuals to purchase housing in underserved markets. Even if gentrification issues can be resolved, it is still not clear if increasing the acceptable LTV ratio will do much good. By renting from higher-income individuals, low-income families can capture part of the tax benefits from mortgage interest and property tax payments. Both of these benefits are lost upon purchase, and neither benefit is affected by the set of available low-income loan programs. The alternative to 258 returns to homeownership ISBN 08157-0614-6 file04 ch7-9 pp201-274.qxd 7/26/2002 2:34 PM Page 258 [3.144.77.71] Project MUSE (2024-04-26...

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