Wealth Accumulation and Homeownership: Evidence
for Low-Income Households (December 2004, 46 p.)
For many years the federal government has promoted homeownership
as an important goal for low-income families. A primary motivation
of this policy goal is the concept that owner-occupied housing
can be an important means of wealth accumulation, particularly
for those lower-income and minority families that are able
to purchase homes. However, very little has been done in the
housing literature to determine the importance of housing
and non-housing sources of wealth accumulation. This determination
has been difficult to address for three reasons. First, detailed
wealth information on families is seldom available on a consistent
basis. Second, such information on wealth is even less likely
to be available over time so that changes in wealth can be
observed. Third, the process of housing wealth accumulation
is dynamic. Housing wealth accumulation depends critically
on how soon a family that is renting becomes a homeowner,
whether or not the family graduates to more highly valued
owned units over time, or becomes a renter again and never
regains homeownership.
The issues above are addressed through an analysis based
upon a unique panel data set, the Panel Study of Income Dynamics
(PSID) collected by the Survey Research Center at the University
of Michigan. The PSID is unique because the location of households
in the sample can be identified at the Census tract level.
Thus, household information can be merged with Census data
for the purpose of the analysis. In addition, the PSID has
detailed information for each household within the sample
on housing tenure (own versus rent), housing expenditure levels,
and household characters, including income and a detailed
breakdown of the net wealth position of the family. Because
of its panel nature, families can be followed over time and
changes in these factors observed.
The dynamics of housing choice and housing expenditure are
modeled to predict potential housing wealth accumulation for
households across income and racial groups. Specifically,
a probability model is developed from which the cumulative
likelihood of homeownership is calculated over time for all
households in the sample. It is important to note that explicitly
accounted for in this approach is the likelihood that, having
become owners, households may subsequently transition back
to rental tenure and/or may move to other owned units over
time. A housing expenditure equation is estimated to predict,
at a given point in time, expected household expenditure.
The higher the likelihood of choosing ownership and the greater
the expenditure predicted, the larger the household’s
base of potential housing wealth. One additional element that
is required to project the amount of housing wealth accumulation
a given household might anticipate is the expected rate of
appreciation in house value. To estimate the expected appreciation
in house value, changes in the median value of owned homes
in the Census tracts actually occupied by the PSID households
are used (rather than regional averages). The predictions
of housing wealth accumulation are compared to actual non-housing
wealth accumulation during the sample period and implications
drawn as to the relative importance of these two mechanisms
for family wealth accumulation. The combination of the dynamic
probability modeling in conjunction with the detailed geographic
and wealth information represents a substantial extension
of the existing literature in this area. There are a number
of interesting findings in the analysis. First, it is important
to note that owners often transition back to renting and,
particularly among low-income minority families, do not regain
owner-occupied housing. Specifically, for those low-income
minority residents who transition out of owning only 37% return
to owned status. For high-income white households this percentage
is approximately 58%. This is a critical issue in that housing
wealth accumulation is impacted by both whether or not a family
returns to homeownership and how quickly this process occurs.
Second, there are significant differences in the movement
to a new house (typically of higher value) with associated
impacts on housing wealth accumulation. For low-income minority
households only 22% actually transition to a second home and
of those about 14% move to a third owned home during the observation
period. For high-income white families the percentages are
higher, namely 33% and 28% respectively. Third, and not surprisingly,
housing expenditures, the basis of housing wealth accumulation
(through appreciation), also vary greatly across household
types. For families differentiated by income, median house
value is approximately $80,000 for high-income white households
and $32,000 for low-income minorities. Finally, the impact
of simple appreciation on housing wealth is relatively similar
in this sample. Interestingly, appreciation between the 1990
Census and 2000 Census in owner-occupied units for tracts
in which PSID families actually lived (rather than regional
averages) suggests similar median appreciation rates, ranging
from a high of 4.6% to a low of 4.3%.
The factors discussed above predict housing wealth accumulation
estimates for families in the sample that are strikingly different
across income and racial groups. For high-income white families
average annual housing wealth accumulation due to appreciation
(ignoring the equity down-payment and forced savings through
amortization) is $4,460 dollars for high-income white households
and $1,712 for low-income minority families. It is critical
to recognize that the numbers for annual housing wealth accumulation
compare very favorably to the actual accumulation of non-housing
wealth by families over the same period. For high-income white
households the average median level of non-housing wealth
accumulation is $2,650, while for low-income minority household’s
it is, quite simply, $0.
In terms of lower income households, non-housing wealth accumulation
is at best minor and, for minority families, often negative.
Thus, over the nine year period of the study, owned housing
is an important means of wealth accumulation. Indeed, the
results may be broadly interpreted for lower income households
as implying that housing wealth is total wealth.
These results tend to support public policies aimed at both
increasing homeownership opportunities in general and those
policies that focus on homeownership for lower income households.
Even though homeownership is not a guarantee of successful
wealth accumulation, in that a small percentage where all
family types lose money on their homes is observed, in general
household wealth appears to be positively impacted by homeownership.
This conclusion is reinforced with comparisons to accumulation
of non-housing wealth. Wealth accumulation for low-income
and minority households, although low, experiences a major
increase through home ownership. In this regard, current initiatives
to increase low-income homeownership seem both desirable and
valid. Moreover, this work suggests that policies designed
to ensure that once households achieve homeownership, they
remain homeowners (rather than reverting to rental tenure),
and policies that enable families to transition to higher
valued owned units over time will increase substantially their
potential housing wealth accumulation. These conclusions about
the value of owned housing are reinforced when the positive
social impacts of homeownership on families, particularly
children, are also considered.
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