Home > Uncategorized > Minority homeownership and wealth-creation

Minority homeownership and wealth-creation

October 21, 2015

I don’t think it makes a ton of sense to invest in houses right now. They’re overpriced in many areas, they pose much more risk as a homeowner than as a renter – assuming the renter laws are locally strong – and there’s no reason to believe their value will increase faster than inflation in the next few years or decades. When the topic comes up, I urge people to rent.

But it’s hard to say that to people, and minorities in particular, when homeownership is taken as a large part of the American Dream, and especially when the recent financial crisis has been so brutal with respect to black homeownership. Because when someone says “don’t buy a house,” what black people might hear is that only white people will ever own homes in this country, and that is somehow the way things should be. But of course that’s not the point, nor is it the starting point of this discussion.

First, we should remember that historically, the government propped up the mortgage market and deeply inflated housing prices first by giving a tax deduction for mortgage payments and second by creating Fannie and Freddie, which established the existence and (relatively) easy attainability of the 30-year mortgage for many, and moreover kept liquidity high, which eventually led to mortgage-back securities, yadda yadda yadda. But the point is this: the easier it is to get financing, the higher prices get. Look at college tuition. The cheaper the monthly payments are, moreover, the higher prices get.

At the same time, government and government-sanctioned policies kept minorities away from buying good houses and obtaining good mortgages in the post- WWII era, which was by far the best time to buy a house. Then homes just kept getting more and more expensive until the financial crisis.

In other words, homes were set up, by the government, to be a good investment about 50 or 60 years ago. That doesn’t mean they are a good investment now. In fact I don’t think they are. But in the meantime, black people were prevented by and large from taking part in this wealth creation, which is absolutely shameful, but it doesn’t mean that they should now be pushed into buying homes in some vain attempt to get a piece of the wealth-creation action. It’s not only historical, either: even now, wealthy minority neighborhoods have less home value per dollar of income than wealthy white neighborhoods.

Part of the confusion around homes and owning a home is the very definition of homeownership. People seem to think they own a home when they’ve signed a mortgage. But, given that down payments can be small, as little as 3%, the difference between having some cash in a savings account and “owning a home” is small, and not especially in favor of the “homeowner.” It simply means you’ve signed a contract putting you on the spot if the roof leaks, if the basement gets flooded with water or oil, or if the housing market dips. It’s true that you get to live in the house, which is a great and useful thing, but you also get to live in a rented house, and you don’t take on all of those risks.

Let me put it this way. If you bought a pie and only had 3% of the money for it, you wouldn’t really think it was your pie, because your slice is extremely small. Plus if a dog came and ate up the pie, you’d be responsible for rebuilding the pie. It is a lot of responsibility and very little in the way of benefit.

A mortgage is basically a highly leveraged and risky financial instrument for the homeowner. And where before the government could be counted on to allay much of the risk through policy, they’ve run out of way to do that. Or, put it another way: what would the US government have to do to make houses even more expensive. given the affordability crisis we now have? And what’s the likelihood they’ll do that?

There’s one good thing, potentially, about entering a mortgage contract for anyone who does it, namely forced savings. If you’re lucky enough that your roof doesn’t leak too often and your basement doesn’t get flooded too often, and if you got a non-predatory mortgage that you can afford to pay in perpetuity given your salary, so it doesn’t matter too much when the housing market dips, and if you don’t lose your job, then mortgage payments – eventually – start going to principal, and you end up saving money for real, as long as the dips aren’t too bad, and that’s a good thing (as long as you don’t refinance with new mortgages that take money out of your house). But that’s a lot of ifs.

Instead of focusing exclusively on homes, I’d like us to move on and think of other ways to help people save money. Of course this starts with them making enough money to have extra to save.

Categories: Uncategorized
  1. G.
    October 21, 2015 at 7:15 am

    I feel like this is too simplistic an analysis. Depending on the rental market, it is often the case that the mortgage and upkeep costs (even with only a 5% downpayment) is lower than the rental price for an equivalent property. In my case, our current living costs for our bought flat, including the repayment (which isn’t really a cost at all) is 25% lower than what we were paying for our former, less nice flat (and the rent we were paying were considered a good deal ). Now, this is partly thanks to a substantial downpayment, but the money we are saving is equal to about a 5% return had we invested the downpayment instead. And all this is without considering increasing property values, and that our cost of living will go down, not up, as the mortgage gets paid off.


  2. October 21, 2015 at 8:00 am

    I don’t disagree about the questionable nature of a home as an investment, but your assumption of strong renter laws doesn’t hold in a lot of places. Here in Alabama, we only got an implied warranty of habitability a few years years ago, and landlord-tenant law isn’t much improved from medieval England: you pay rent, you get possession. There’s not much in the way of protection from rent increases & eviction or of required maintenance & repair.

    How would a lack of any significant renter protection laws affect your advice?


    • October 21, 2015 at 8:02 am

      Very severely, although not totally. There are various risks involved in buying, and maintenance and repair are definitely part of it, but so is home value fluctuations.

      Actually, you’ve made a great point. I think the point of my post, at the end, should have been to take up the national cause of strong renter laws to exactly address this issue. Especially when private equity and hedge funds are buying up houses in places with weak renter laws and making them weaker.


      • Dwight Thieme
        October 24, 2015 at 7:10 pm

        Two words: college town. Don’t get me wrong, Columbia, MO was a great place to raise a kid. But strong tenant protections it has not. College students get more than one type of education here (now there) when they move out of the dorms and rent for the first time.


  3. October 21, 2015 at 8:15 am

    You do have to look at specific circumstances on a case-by-case basis, but the main point is that home-ownership is NOT automatically the best choice as so many touted over the years. I’ve rented my whole life, and, even before the economic meltdown, watched acquaintances (who told me I was an idiot) suffer under home-ownership complications when unforeseen divorces, job losses, medical events, death, or other sudden changes altered their lives. It’s not strictly a financial calculation, but involves practical and lifestyle considerations as well.


  4. Zathras
    October 21, 2015 at 8:54 am

    “…they pose much more risk as a homeowner than as a renter – assuming the renter laws are locally strong…”

    This begs a question. You talk a lot about how incentives to buy distort the market. It’s pretty apparent that “rental law that are locally strong” also distort the market. Why should I prefer pro-rental distortions, but not pro-ownership ones?


    • October 21, 2015 at 9:49 am

      It’s not clear to me that weak renter laws affect rent directionally. Theoretically weak renter laws should give rise to lower rents, since the renter should be subsidized for the extra risk they take on, perhaps in the form of more competition from hedge funds etc., but then again weak renter laws also tend to lead to consistently high rent hikes.


  5. Grwww
    October 21, 2015 at 10:29 am

    Ultimately, the ability of any single person to change their place in the wealth chain, is simple, they just need to find the right opportunity for their skill set. Practically, for “everyone” to find wealth, we would need to have the FED and other world banks print a lot of money which would create a pretty explosive inflation event. If everyone had enough “money” to live well, we’d have to make a lot of things “free” so that the inflation event would not happen.

    Making things “free” is where the arguments start. How can it be free if someone has to make it. This is where robotics and a lot more automation of manufacturing, including robots creating and repairing robots, will start to make our lives really just be about the simple businesses of health through medical care and food and shelter.

    We have to get people to either work for free because it’s fun, and there are no other costs which require them to have money (complete socialism without robots), or we have to understand that there will always be people at the bottom and people at the top and a lot of people in the middle, having good lives.

    The biggest problem we have is the decision that everything has to happen as a for profit or at least not profitable/break even business. Something really just need happen because we can make them happen and its the right thing to do.


    • Josh
      October 21, 2015 at 11:50 am

      Actually, quite a lot is free today, at least in some sense.

      The government provides free health care for seniors and free education through high school. Fifty years ago, the government in many places provide free college, too (and globally that is still true, just not in US so much).

      The government provides free military “defense” and free electronic surveillance. (we may not like everything we get, but it is provided)

      In addition, there is private free stuff. Wikipedia is free, provided by volunteers and some voluntary contributions. Much of the backbone of the internet (e.g. the software running most of the servers) is open source and in many cases written and maintained by volunteers. For-profit companies such as Google provide stuff “free”.

      Of course, most of it is paid for in some way. Government taxes to pay for stuff, Google snaps up our data and exploits it or sells it, …

      But much activity today is neither for-profit or breakeven not-for-profit model.


  6. October 21, 2015 at 12:20 pm

    Having rented my entire adult life, I agree with your basic caveats about home ownership. Of course, the assets are location specific, so there will always be someone, somewhere, able to say that houses in their area at this time are (probably) attractive.

    However, there is also a powerful emotional connection that seems to come with owning (or believing yourself to own) a property. The effects I’ve seen show up best whether/how quickly neighbors form relationships and in the treatment of near-by common resources: schools, transportation infrastructure, parks and nature areas. Clearly, minority groups shouldn’t be discouraged from these experiences.

    Also, there is a complex relationships between choosing not to buy and not being allowed to buy. The fact that I can’t legally own property where I currently live is an important reminder that I’m not really welcome here.


    • October 21, 2015 at 12:22 pm

      I absolutely agree with all those points. But as one of my links pointed out, even when minorities own homes, it doesn’t follow that all other things work out well for them.

      On Wed, Oct 21, 2015 at 12:20 PM, mathbabe wrote:



  7. PandaMomentum
    October 21, 2015 at 1:43 pm

    Economists in general dislike home ownership as an asset strategy because it immobilizes people into local labor markets (vs. the literal “option value of renting”). Minority and low income households are already plagued by low and constrained mobility (e.g. http://www.bpichicago.org/blog/housing-mobility-what-is-it-and-why-is-it-so-controversial-part-1/) . Thus finding novel ways to subsidize and support savings by low-income households ought to be a progressive priority – we know that wealth matters, a lot, for all kinds of non-economic outcomes including educational attainment, life expectancy and health, and we know it’s vastly unequal in distribution and literally reflects the inheritance of slavery and slave ownership. So: what’s the equivalent to the mortgage tax deduction, GI Bill/Fannie Mae/Freddie Mac for low income savings?


  8. Karin Brodie
    October 21, 2015 at 2:03 pm

    My father always taught me that there are two important things to have when you are too old to work. A roof over your head and a pension to live on. While buying a house may not be the best investment, after 30 years it will be yours. If you encourage people to rent then surely you must make clear that they also need to invest at the same time to get better returns than a house and most people cannot afford to do both. So if you rent you are actually funding someone else’s retirement and not your own. It would be really good if you could talk to this on the podcast.


  9. October 21, 2015 at 6:19 pm

    Reparations for minorities who were screwed by the rest of us


  10. Tara
    October 21, 2015 at 8:43 pm

    I don’t quite know how I would make your argument in, or adjust it to Ithaca. Housing (rented or owned/mortgaged) in Ithaca is much higher than the surrounding areas (not NYC prices, but truly not cheap). Local property taxes are incredibly high, which also means that landlords don’t really make that much money around here, so basically rental properties tend to be in very poor condition. If we wanted to rent a house in good condition, our best bet would be sabbatical rentals … but then that would mean moving every year or two. I completely agree that buying a home in Ithaca is not a good investment, but I don’t think we have such a good rental alternative. (And I guess thinking from the other side, it has on occasion (when the lottery hits crazy levels!) occurred to me that hypothetically I ought to invest in real estate in Ithaca in order to fill this gap … but the aforementioned property taxes and the risks you describe really seem like they would make that also not a good investment.)


  11. davidflint
    October 22, 2015 at 10:51 am

    US houses must be different those in the UK or something. The value of my house – a nice house in a London suburb – has risen c220% in 19 years. I make that 7%pa compound. My annual home ownership costs might take one point off that.

    It’s been many years since I could get that sort of rate from a safe investment and no-one knows when such rates might return. Perhaps not in my lifetime. Meanwhile house prices keep rising.

    And I get the use value as well as capital gain and time to see trees grow.

    Houses are a still a good investment here -p but ever fewer people can find the deposit.

    PS: Saw you in ‘The Divide’ on Sunday. Brief but good.


    • sglover
      October 22, 2015 at 5:16 pm

      Isn’t London one of the weirder, most exceptional real estate markets on the planet? Few communities in North America have a lot of Russian oligarch/Gulf State sheikh money skewing the numbers.


      • davidflint
        October 23, 2015 at 4:29 am

        Yes – completely appalling. No rent controls, high rents, little new building, policies to encourage home ownership that just drive up prices. Etc. But London is 15% of the UK and the effect spills over into another c20% so it’s not exactly marginal here.


  12. davidflint
  13. Thorsten J
    October 23, 2015 at 1:25 pm

    Its true that renting reduces various kinds of risks — you don’t have to replace the roof or the furnace if they break. But renting comes with the risk that rents will rise, which is a type of risk you avoid if you buy. This becomes relevant in gentrifying neighborhoods, when rising rents can force out long-time residents if they are renters, but not long-time home owners.


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