Thursday, February 18, 2016

Update on Homeownership Wealth Trajectories Through the Housing Boom and Bust

Senior Research
The housing crisis and ensuing Great Recession of the late 2000s resulted in millions of homeowners losing their homes to foreclosure and millions more losing substantial amounts of housing wealth as home prices plummeted. These substantial financial losses have raised important questions about the appropriateness of policies to encourage homeownership as a wealth building strategy for low-income and minority households. To study this issue, in 2013 the Joint Center published a paper entitled “Is Homeownership Still an Effective Means of Building Wealth for Low-income and Minority Households? (Was it Ever?)” as part of a 2013 symposium held to reexamine the goals of homeownership and explore lessons learned from the housing crisis.

Since the original paper was completed, additional years of PSID data have become available that allow us to extend the original analysis through 2013, which we have now done in a new JCHS working paper.

The original paper looked specifically at the question of whether homeownership, particularly for low-income and minority families, was an effective means of building wealth during the most tumultuous housing market in recent memory. Studying the 1999-2009 time period, the paper found that even during a time of excessive risk taking in the mortgage market and extreme volatility in house prices, large shares of owners successfully sustained homeownership and created substantial wealth in the process; that renters who became homeowners and sustained it through the period had some of the largest gains in wealth; and that renters who transitioned to ownership but failed to sustain it ended the study period with no less wealth than when they started. Yet while the results were positive in supporting the benefits of sustained homeownership, the study only covered the time period through 2009, which was the latest year of data available at the time, and therefore did not capture the entirety of the housing downturn and related fallout. Indeed, according to the CoreLogic National Home Price Index, house prices did not reach bottom until March of 2011 and much of the foreclosures and distressed exits from homeownership resulting from the downturn occurred well after 2009.

In this new 2016 paper, Update on Homeownership Wealth Trajectories Through the Housing Boom and Bust, with the extended timeframe through 2013 more thoroughly capturing the extent of the housing downturn and its accompanying effects on families’ wealth accumulation, our updated analysis upholds the bottom-line result from the earlier paper: that homeownership was associated with significant gains in household wealth, even when viewed across the tumultuous housing crisis period of 1999-2013. However to sustain gains in household wealth from homeownership, we found it is critically important to sustain homeownership itself. 

Despite the continued declines in home values and continued high levels of foreclosure beyond 2009, the extended analysis found that homeownership was still associated with sizeable gains in household wealth in 1999-2013 for those who sustained homeownership through 2013, just as the original analysis found for those who owned through 2009. Among those who bought a home after 1999 but had returned to renting by 2013, the net wealth of the typical household in 2013 was back to what it was for these households in 1999, which was similar to the median net wealth of households among those who rented the entire time. As in the earlier study, households who began the study period as homeowners but ended as renters experienced the most significant declines in wealth. The key differences in the updated analysis was that the annual gains in wealth associated with owning a home declined in magnitude and the share of both Hispanic and low-income households that were able to sustain homeownership declined to 60-61 percent.

Note: Values shown are modeled marginal effects in constant 2013 dollars.

But while those who maintained homeownership experienced meaningful gains in wealth, the relatively high shares among some groups that failed to sustain owning does raise the question of whether homeownership is a risk worth taking. On the other hand, the fact that renters accrued little wealth over the same period points to the limited opportunities that low-income households have outside of homeownership for building a nest egg. Taken together the study’s findings of both the remarkably and persistently low wealth levels of the typical renter and the potential for wealth accumulation when homeownership is maintained underscore the need for policies both to support sustained homeownership as well as to help renters find ways to build wealth outside of homeownership.

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