Is Housing the Best Way for Low-Income People to Build Wealth?

I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help’s Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.

At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.

The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.

In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.

Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.

About Richard K. Green 102 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

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