Academic journal article Journal of Regional Analysis & Policy

The User Cost of Low-Income Homeownership

Academic journal article Journal of Regional Analysis & Policy

The User Cost of Low-Income Homeownership

Article excerpt

Abstract. Empirical research examining whether owning a home is less costly than renting for low-income households is largely lacking. We use detailed property information provided by a set of low-income homeowners who participated in the Community Advantage Panel Survey, along with a matched sample of similar rental properties from the American Housing Survey, to determine whether low-income homeowners in the United States would have experienced lower housing costs by renting between 2003 and 2011. We calculate the homeowners' user costs directly from the survey data, and we derive hedonic measures of equivalent rent for these homeowners via pooled regressions of house prices and rents on housing characteristics, from which we obtain capitalization rates. For the median homeowner in our sample, we find that owning was less costly than renting a comparable property between 2003 and 2011.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Although government efforts to foster low- income homeownership have been ongoing for dec- ades, it is still an open question as to whether and when such policies actually generate benefits for low-income households in financial or social terms (Dietz and Haurin, 2003; Shlay, 2006). From a finan- cial perspective, proponents of low-income home- ownership sometimes observe that low-income homeowners, on average, tend to accumulate posi- tive wealth, while comparable renters do not (Boehm and Schlottman, 2004b; Turner and Lue a, 2009). In particular, homeownership can be viewed as a savings commitment mechanism, and evidence also suggests that the return on investment from leveraged homeownership often dwarfs the unlev- eraged returns to other common investment vehi- cles, such as stocks and bonds (Stegman et al., 2007; Hasanov and Dacy, 2009).

However, the extent to which individual low- income households accumulate or lose wealth through homeownership depends greatly on the location and timing of the house purchase, as well as on the length of time for which homeownership is sustained (Case and Marynchenko, 2002; Duda and Belsky, 2002). Transaction costs are often a larger proportion of total homeownership costs for low- income households, who have been historically like- ly to hold their houses for shorter periods of time (Boehm and Schlottman, 2004a,b; Turner and Smith, 2009). Moreover, any tax benefits from mortgage interest deductions are widely recognized to be small, if not negligible, for low-income households, especially when the standard deduction is consid- ered (Beracha and Tibbs, 2010; Poterba and Sinai, 2011). Finally, surveys of financial literacy have called into question the general competence of American households, and especially the low- income population, in making rational and informed financial decisions (Bucks and Pence, 2008; Lusardi and Tufano, 2009). Thus, it has been suggested that government programs that facilitate and promote low-income homeownership may do more financial harm than good to the households involved, and that low-income households would have been better off renting than owning during the recent housing price bubble and subsequent financial crisis (Baker, 2005).

Despite the longevity and vigor of the debate about whether homeownership makes sense for low-income households, empirical research examin- ing directly whether owning is, in practice, less cost- ly than renting for this population is largely lacking (Duda and Belsky, 2002). To address this short- coming of the existing hterature, we use detailed information provided by a set of community rein- vestment mortgage recipients to assess whether low-income homeowners would have been finan- cially better off renting during the period from 2003 to 2011 from the perspective of the ex post user cost of capital.

Our primary data set comes from the Communi- ty Advantage Panel Survey (CAPS) and comprises information about a sample of primarily urban low- income homeowners who all originally received 30- year, fixed-rate mortgages at near-prime terms through the Community Advantage Program (CAP), which is a secondary mortgage market demonstra- tion program for mortgages that meet the terms of the lending test of the Community Reinvestment Act (CRA). …

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