Low-Income Homeownership: Examining the Unexamined Goal

Chapter 14. Housing and Wealth Accumulation: Intergenerational Impacts

“A nation of homeowners is unconquerable.” —Franklin D. Roosevelt As is well known, for over sixty years the federal government has promoted homeownership as a critical component of achieving the American Dream. Housing policy has formed a significant cornerstone of the nation’s “poverty agenda” as well as represented a separate policy initiative. Two specific examples from the past decade illustrate this point. In 1991 The President’s National Urban Policy Report issued by the U.S. Department of Housing and Urban Development (HUD) contained six priorities that formed the department ’s poverty agenda. One of these priorities was to encourage homeownership and expand affordable housing opportunities. More recently, the Clinton administration directed HUD to work with the housing industry and a number of private nonprofit organizations to develop a National Home Ownership Strategy.1 Recently, the analysis by Orr and Peach (1999) has reconfirmed the significant financial commitment that families are willing to bear in order to achieve 407 Housing and Wealth Accumulation: Intergenerational Impacts thomas p. boehm and alan m. schlottmann 14 The authors would like to thank the Scholarly Research Grant Program in the College of Business Administration at the University of Tennessee and the Joint Center for Housing Studies of Harvard University for their financial support of this project. 1. For a detailed discussion of this policy initiative, see U.S. Department of Housing and Urban Development (1995). file06 ch13-16 pp375-478.qxd 7/5/2002 2:26 PM Page 407 homeownership. The financial commitment (average housing costs as a percentage of family income) associated with lower-income households is striking. As discussed by Orr and Peach (1999, p. 55–57), the percentage commitment runs from 40 percent to 60 percent. As outlined in Mayer (1999, p. 82), when the financial risks to lower-income households of homeownership are recognized, the “demand” by American families to own is quite strong. This chapter focuses on developing a clear picture of the impact of income and wealth on the transition to homeownership. It examines specifically the process of wealth accumulation and the savings/investment dynamic for young households. These relationships are critical to the transition to homeownership and subsequent wealth accumulation. In particular, we stress the role of parental homeownership on the timing of transition to homeownership and, ultimately, wealth accumulation of their children. In this regard, we briefly discuss three recent strands of the literature in housing economics. An extensive empirical literature was developed in the 1980s to determine the factors affecting homeownership. An interesting set of studies is referenced in Boehm (1993) and Henderson and Ioannides (1986). In general, the literature concluded that income, relative prices, and a family’s life-cycle situation were the primary factors that determine the likelihood of a home purchase. The role of permanent income in the demand for housing was also established; see, for example, Goodman and Kawai (1982) and Ihlanfelt (1980).2 However, the dynamics of wealth accumulation and intergenerational transfers were treated, in general, in fairly abstract terms, if at all. Recent literature has tended to emphasize three general themes, all of which share a dynamic element. The first theme involves the interaction of homeownership and wealth. For example, the recent work of Gyourko, Linneman, and Wachter (1999) explores the role of wealth in the context of differential rates of homeownership by race. They find no racial differences in ownership rates among households with wealth sufficient to meet down payment and closing requirements. However, significant differences in ownership rates occur in “wealth-constrained” households. Several studies investigate the special role of homeownership in wealth accumulation and its relationship to tenure choice. In a series of interesting studies, Haurin, Hendershott, and Wachter (1996b, 1996c) explore wealth accumulation and housing choices of young households.3 Their empirical results confirm the joint nature of housing choice and wealth accumulation. On the one hand, homeownership is an important component of total wealth; conversely, households need a minimal level of wealth to purchase their first home given financ408 socioeconomic impacts of homeownership 2. Specifically, in most studies estimates of permanent income elasticities are approximately twice the measured income elasticities. 3. For an interesting analysis of changing housing wealth in the United Kingdom, see Maclennan and Tu (1998). file06 ch13-16 pp375-478.qxd 7/5/2002 2:26 PM Page 408 ing requirements. Other authors have analyzed the response of savings to differential housing prices; the studies by Sheiner (1995...