A Dream Too Far

Owning a home is a key rung on the ladder of economic advancement. What happens if that rung remains elusive for many?

October 28, 2015

It’s been almost a year since the gap between America’s wealthiest and middle-income families reached its highest level on record. The Pew Research Center found the median net worth of the nation’s upper-income families ($639,400) was almost seven times that of middle-income families ($96,500), making for the widest wealth disparity since the Federal Reserve began collecting such data. The situation was ten times worse for the families earning too little to enter the middle income bracket, with a 70-to-1 ratio separating them from high-income families.

Paul Weech, CEO of NeighborWorks, a national coalition of local affiliates working to support affordable housing and community development, has been watching this gap for decades. “We’ve always had inequality in this country [but] the macro data has shown a growing gap,” he says. “It’s a fact that more and more of the wealth is flowing to fewer people.”

For those who care about maintaining a high home ownership rate, it’s a troublesome trend, says National Association of REALTORS® Chief Economist Lawrence Yun. “It’s certainly not in the interest of broader America, and it’s something that everyone should be concerned about.”

A Vicious Cycle

Though no one was immune to the Great Recession, its impact was felt far more acutely by lower-income Americans than those with more wealth. “The housing boom and bust really did widen wealth inequality,” says Laurie Goodman, director of The Urban Institute’s Housing Finance Policy Center. And an uneven recovery has only exacerbated the divide. While the stock market rebounded for investors—the latest tumult notwithstanding—many current and former home owners are still dealing with fallout dating back to 2008.

Some positive economic indicators are not as reassuring as they once were. Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies, notes that even though the unemployment rate has decreased significantly, many of the gains have been in low-wage, part-time jobs with few benefits. “There’s still a lot of underemployment,” Herbert says. “A 5 percent unemployment rate is not what it used to be.”

One of the most common ways for Americans to move up the economic ladder and invest in other wealth-generating activities—such as the stock market, paying for advanced educational opportunities, or starting a business—is by leveraging equity they have in their homes. “We traditionally have been huge supporters of home ownership,” says Weech. “We see it as a way to provide stability for households but also as an asset-building strategy.”

John Taylor, CEO of the National Community Reinvestment Coalition, an association of about 600 organizations focused on improving access to private capital in underserved communities, agrees that those who lack the opportunity to become home owners have a weakened ability to reinvest their wealth. “If you continue to be a renter, locked out of the home ownership arena, increasingly those things are further and further out of reach,” he says, noting the correlation between low home ownership levels and high wealth inequality. “They’re joined at the hip. They perpetuate each other.”

In the second quarter of this year, the home ownership rate fell to 63.5 percent, its lowest level since 1967. In particular, the relative scarcity of first-time buyers suggests continuing challenges for an industry that relies on a continual move-up trend. “If people cannot make that first step into their starter home, it stops the whole chain reaction,” Yun says. “For a home owner in the upscale neighborhood, who are the future buyers?”

Opening the Credit Box

Many would-be buyers are still unable to take advantage of home affordability—fostered by low interest rates—because they can’t secure mortgage approval. They entered the market on the wrong side of the “buy low, sell high” equation, and now they’re locked out. “They suffered disproportionate losses,” says Goodman. “Now, we see mortgage credit being unavailable exactly when it would be the most useful.”

Goodman says pilot programs that use less traditional credit-scoring factors—such as allowing family members who are not on the deed to contribute to the overall tally of household wealth and counting utility, cell phone, and rent bills toward payment history—can help correct this. “Right now if you don’t pay utility bills on time it hurts you, but if you do, it doesn’t help,” she says. “This will allow [companies such as Vantage and FICO] to score a lot more people than before.”

Goodman also favors a closer focus on overall employment history, rather than a person’s longevity with a single employer. “Take someone who’s had three jobs over the last three years but has been steadily employed. That person wouldn’t be able to get a mortgage [under current rules],” she says. “Rethinking those types of issues is very important.”

To ensure lower- and middle-income Americans have access to nonpredatory loans, Taylor says, the federal government needs to strengthen the Community Reinvestment Act. The 1977 law aims to ensure banks serve the credit needs of everyone in the communities where they work. The Federal Reserve Board enforces the rule, but Taylor says banks have found loopholes, such as closing branches in low-income areas. Taylor also describes a sophisticated game of hot potato, where bank A sells a mortgage that satisfies CRA requirements to bank B just in time for bank B’s CRA inspection. Then bank B turns around to sell the same qualifying loan to bank C for the same reason, so they’re all using one loan to secure passing grades. “Frankly, it’s pretty sad,” he says.

Building More Homes

Another approach to improving access is to increase the supply of affordable homes. In September, NAR released a study that found new-home construction was not keeping pace with job growth in two-thirds of the 146 metro areas it studied.

Increased tax incentives for builders of low- and moderate-income housing could help, but  that alone won’t solve the problem. The crunch is partly a result of slow permitting. “Many local and state officials are not providing what the builders are requesting,” he says. “Approving more permits will allow more building.”

Taylor says he has spoken with major home builders who want to alleviate the inventory crunch but can’t due to permit issues. “A lot of cities and towns don’t necessarily want to build moderate-income homes,” Taylor says, but he predicts the Supreme Court’s recent ruling upholding the validity of disparate impact claims under the Fair Housing Act will make it harder for municipalities to hamper building. “It’s only going to take the federal government suing the first three or four towns and emptying out their coffers before they all come up with [low- and moderate-income housing] initiatives.”

Such initiatives are likely to benefit local economies in the long-term. A recent Harvard University study found that when low-wage workers are forced to migrate to lower-cost areas, the cities they leave behind stagnate. So without affordable housing, cities such as San Francisco will find it difficult to maintain a balanced workforce. “It undermines the ability of metro areas to grow,” Herbert says. “Not everyone can be a software developer. Somebody has to be doing all the other jobs that need to be done in that economy. The Bay Area would be growing much faster if it didn’t have this problem.”

Some problems go far deeper. Dysfunction in the public education and criminal justice systems weighs more heavily on the poor. The housing and mortgage industries can do little to alleviate these deep-seated societal challenges. “The thing about the credit issues is that they’re solvable,” Goodman says. “You work on what you can fix.” But Taylor says policy makers should be paying attention to how these dilemmas are affecting people’s ability to own a home. “The 48-year low in home ownership ought to be the canary in the coal mine letting Wall Street and banks and others know we’re reaching a tipping point.”

Meg White

Meg White is the former managing editor of REALTOR® Magazine.