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Homeownership: The right choice for low-income families?
Advocates say home ownership is still a good way for low-income families to build wealth - but it shouldn't be their only form of savings.
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Breeann Mack looks skeptically at the kitchen ceiling of a foreclosed townhouse outside Saint Louis. Or perhaps more accurately, she looks at exposed plumbing and electrical wires where the ceiling is supposed to be. Without even checking the upstairs, Mac decides she’s seen enough. Even though the home is priced at only $45,000, she’s not interested in fixing up someone else’s mistake – not if it means overextending herself financially and potentially making a mistake of her own.
“I want to try to make sure that I’m OK-OK and that, financially, I can pay for the house, the down payment, furniture if I need it,” she says. “I have to be realistic in it.”
Mack, 32, lives with her mother. She spent four years paying off all her debt. Now, she’s thinking very carefully about what she can afford on her $33,000 dollar salary. She’s been pre-approved for a $90,000 dollar mortgage. If she goes with a loan backed by the Federal Housing Administration, her down-payment could be just over 3 percent of that. She wants to keep her payments around $500 a month.
People like Mack are the upside of the housing crisis, says Chris Krehmeyer, the president Beyond Housing, a local nonprofit where Mac’s received financial counseling.
People are much cautious now, he says; some are even scared of homeownership – and that’s a good thing, if it prevents people from taking on more home than they can afford.
But Krehmeyer still believes that most people – even the lowest income families – should be able to buy a home.
"Is there some number where you can't? Sure," he says. "What is that number, it depends upon the marketplace. But just to say arbitrarily if you make less than $26,000 that you can’t become a homeowner, that may not be true."
Krehmeyer says homes are still the best way to help build wealth and pass that wealth on to future generations. It’s just that getting lower income homebuyers through the purchasing process is more complicated.
Beyond Housing runs classes to get people ready to purchase a home and their manage expectations.
Standing in front of roughly two dozen potential home-buyers on a Saturday morning, instructor Chris Gilliam explains that lending standards have tightened.
"Underwriters, that’s the gatekeeper, they’re looking at more things, more factors than they used to," he says.
Attendee Coretta Johnson already knew she had to pay down her credit card debt. But she’s just learned that routinely overdrawing her bank account, which she does once or twice a month, could look bad on her loan application.
"That’s hurting me right now," she says. "Because I know I’m a responsible individual and I just want to leave my kids something. I want to have something in my life that I can say I accomplished and I did."
Homeownership has many benefits, says Ray BO-shara, senior advisor with the Federal Reserve Bank of Saint Louis. "Typically homeowners have about 35 times the wealth of renters."
Many homeowners get tax subsidies; they tend to save more; Kids of homeowners are even more likely to go to college.
"The problem isn’t homeownership," he says. "The problem is if you only pursue homeownership."
See how many houses are underwater in your state. View the interactive map.
In 2007, the bottom 30 percent of homeowners had over half of their total assets in their homes, according to Boshara, who says a more appropriate number would be something around 20 percent.
So while he's still pro-homeownership for low income households, Boshara also thinks people need to build more pain-old vanilla savings and look at other kinds of investments.
"Historically the stock market has outperformed the housing market in terms of an investment," he says. "Many people even think it’s wrong to think of home-ownership as an investment given the risk."
But stocks can be a tough sell.
"It’s kind of scary," says Coretta Johnson, who has invested in a Roth IRA. "I mean I’d rather lock my money up in something that’s benefiting me."
A house is an investment Johnson can live in. She wants a one-story home where she can grow old.
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Kudos to Coretta for focusing on the basics to improving her financial situation ahead of looking into homeownership. She's right to go into the transaction cautious and eyes wide open. The initial transaction costs and the continuing monthly obligation is just the tip of the iceberg for homeownership that renters need to be aware of - continuing costs of maintenance and upkeep need to be considered as does the risks you bear as an owner that currently are borne by the landlord (storm and other damage).
Deckhand's comment is spot on - a house is first and foremost a place to live and an alternative to renting. Full in costs and benefits should be considered when making the home purchase decision (or any big ticket purchase for that matter). For any buyer and not just the lower income buyer - not getting drawn in by the marketing of the National Realtor's Associations or Mortgage Banker's Association when some of the tax and financial benefits either won't apply or aren't sufficiently material given your individual situation needs to be a consideration up front. Likewise, given the individual's family situation, stage of life, and mobility need to be considered especially in a low down payment situation. If you need or want to move in the first 5-10 years and put down 3%, you'll need to be prepared that without considerable appreciation (which can't be counted on) you may need to bring money to the table to sell the home.
I hope things work out for Coretta, I'd suggest she stabilize her finances just a bit more given her overdrawn checking account twice a month. While understandable given her income level, a failed water heater or a roof leak would upend her and create risks and temptations to get hard money from sources like a payday-lender which would create a financial spiral and potential for delinquencies and costs that would by and far outstrip the benefits of homeownership.
*QUOTE: A house is an investment Johnson can live in. *
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I'm old enough to remember when people bought stocks for the dividends the company paid once or twice a year. How "old school."
I also remember when people bought houses as a place to live. I mean.... even if a house you occupied for twelve years does nothing more than sell for the same price you paid for it, you just got a rent-free place to live for those twelve years. Compare that to paying $850 / month for a dozen years.
(not to mention the joys of not having a stupid, noisy neighbor in the adjoining apartment... )
