How does homeownership contribute to wealth building?
Low-income households and households of color have limited access to homeownership because of barriers such as the limited supply of affordable housing, restricted access to credit, and systemic inequities. For those low-income households and households of color, homeownership can be a catalyst to wealth building. Home equity accounts for over half their net wealth, but these gains from homeownership vary by income, gender, and race/ethnicity.
Financial benefits of homeownership for low-income households
Overall, homeownership promotes wealth building by acting as a forced savings mechanism and through home value appreciation. Homeowners make monthly payments that increase their equity in their homes by paying down the principal balance of their mortgage. Home value appreciation also helps homeowners build wealth by enabling them to realize greater proceeds if they sell the home or borrow against the additional equity. In addition, owning a home promotes intergenerational homeownership and wealth building. Children of homeowners transition to homeownership earlier — lengthening the period over which they can accumulate wealth — and have homeownership rates 25 percentage points higher than the rate of children of renters.
For every dollar in net wealth accumulated by a high-income household, a low-income household amasses 7 cents. This wealth gap has significantly widened over the past decade (Figure 1).
Homeownership is a substantial contributor to the wealth of low-income households, since they hold the majority of their wealth in their homes. But do low-income households achieve greater financial returns through homeownership than through renting?
Low-income homeowners with sustained ownership and affordable loans have higher wealth accumulation — both housing and non-housing wealth — than comparable renters. Furthermore, low-income homeowners earned higher financial returns than high-income homeowners when the annual costs and benefits of homeownership, which include imputed rents (the rental value that the homeowner would get from renting their home at the market rate), are estimated. The ratio of imputed rents to home values declines with income level and drives this result. The rate of return, however, hinges on the value of imputed rent and the homeowners’ ability to build home equity.
Providing affordable financing and refinancing loans at lower interest rates help low-income households to build equity in their homes.
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Low-interest rates reduce the cost of financing and enable homebuyers to contribute more of their monthly mortgage payments to principal — and equity-building — than to interest payments.
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Increasing the initial mortgage interest rate by 1 percentage point increases the probability of exiting homeownership by 16%.
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Low-income households are more vulnerable to predatory lending that lowers home equity through fees, poor underwriting and high penalties. Interest rates for subprime loans can be more than 4 percentage points higher than traditional loans.
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Low-income households are less likely to refinance their existing mortgage to take advantage of lower interest rates. Failing to refinance reduced their aggregate wealth by $22 billion.
Sustaining homeownership allows homebuyers to recoup the transaction costs associated with the purchase of a home and to weather home value fluctuations.
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Transaction costs to buy and sell a home can average 8% to 10% of the value of a home. Homeowners can offset the transaction costs by remaining in their homes long enough for home values to appreciate to cover tho appreciate to cover those costs.
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Living in the home for a longer duration also allows homeowners to weather short-term fluctuations in home values and realize positive financial returns.
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Low-income households tend to pay a higher share of their monthly income for housing than do higher-income households, and they have less savings to cushion unexpected financial events such as a job loss or health bills. For low-income homeowners, a loss in income increases the probability that they will transition to renting by 74%. Within five years of buying their first home, over half of low-income homeowners return to renting, compared with 25%-30% of high-income buyers.
Appreciating home values increases the equity in the home, especially at the time of resale, but the rate of appreciation depends on the timing and location of the home purchase.
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There is mixed evidence regarding whether lower-priced homes, the type of homes typically purchased by low-income homebuyers, have lower rates of appreciation than higher-priced homes. The level of appreciation depends on the specific period and market.
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Low-Income households that purchase during periods of high home appreciation are more likely to realize wealth accumulation than renters, but the reverse holds true during periods of lower appreciation.
Financial benefits of homeownership for Black and Hispanic/Latinx households
The homeownership rate of white households continues to exceed those of Black and Hispanic/Latinx households, and for Black households, this gap has widened. Black and Hispanic/Latinx households trail white households’ overall accumulated wealth and amount of equity amassed in their homes, which is the primary contributor to their net wealth. But how do the financial returns of Black and Hispanic/Latinx homebuyers compare with that of white homebuyers? After accounting for the annual costs and benefits of homeownership, Black and Hispanic/Latinx homebuyers — regardless of income level — achieved returns that outpace that of white homebuyers. This result centers on Black and Hispanic/Latinx homebuyers having higher ratios of imputed rent (the rental value that homeowners would get from renting their home at market rates) to home values. However, in addition to the factors discussed earlier, Black and Hispanic/Latinx homebuyers face key barriers that may impact their ability to build equity.
How Habitat contributes
Habitat affiliates help homeowners build equity by keeping the cost of homeownership affordable for low-income families so that homeowners can begin to accrue equity immediately. Habitat is committed to ensuring mortgage payments consume no more than 30% of a homeowner’s income and meets this goal by offering financial packages composed of low- or zero-interest loans and forgivable loans. These creative financing packages also help sustain homeownership by providing flexible mortgage restructuring options and other financial support to homeowners when they lose income.
Habitat also offers down payment assistance that helps people access homeownership earlier and begin accruing equity sooner, granting them more financial resilience and the ability to focus on other financial goals.
Habitat builds modest homes and manages the cost of land acquisition, development and construction to keep the overall cost of homes low. Moreover, Habitat lowers transaction costs by eliminating the need for real estate agent and other transaction fees.
Many Habitat affiliates are leading the way on permanent affordability, using land trust programs and shared-equity models to help growing numbers of families build equity through their homes while ensuring that future homeowners will have the same access to affordable homeownership. These tools help manage expensive land costs and rising home prices to retain affordability while still enabling families to build equity through their homes.
Habitat affiliates also provide financial education classes and pre- and post-purchase counseling that provide tools and strategies to manage household finances, which can render homeowners better able to continue to meet their mortgage payments and sustain homeownership.
Habitat’s repair programs offer homeowners the opportunity to affordably address acute housing problems and improve the quality of their homes. This allows homeowners to maintain their homes at an affordable cost and continue to build equity through homeownership.
In addition to the direct services that keep homeownership affordable, Habitat advocates at all levels of government for policies and programs that make affordable homeownership more broadly available and support homeowners in building equity through their homes. Our advocacy work focuses on expanding access to safe, low-interest mortgages; tax credits and saving incentive programs to help low-income families build financial reserves; resources such as housing counseling and short-term mortgage assistance to prevent foreclosure; and policies aimed at reducing regulatory barriers to building affordable homes in appreciating markets.
The Why Home Matters evidence series is a multi-part exploration of existing research on the impact of homeownership created by Habitat for Humanity International. Each evidence brief in the series investigates and presents evidence on outcomes related to affordable housing and homeownership while also highlighting specific ways that Habitat’s work contributes to improving outcomes for families and communities.