NCPA - National Center for Policy Analysis


August 22, 2007

A home financed by a mortgage is not just an asset. It's also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the "low income homeownership boom."  She considered a simple question -- "whether or not low-income households benefit from owning a home."

Her discoveries are bracing, says columnist Holman Jenkins Jr.:

  • Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36 percent returned to renting in two years, and 53 percent in five years.
  • Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30 percent -- less than if their money had been invested in Treasury bills; this meager capital gain was about half that enjoyed by middle-income homeowners.

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education.  Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Reid's counterintuitive discovery was that higher-income households were "twice as likely to move long distance if they're unemployed."

Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won't turn a house into a paying proposition for those with little income to shelter.

Bottom line: Home ownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families, says Jenkins.

Source: Holman W. Jenkins, Jr., "Payback," Wall Street Journal, August 22, 2007.

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