Homeownership has been knocked around lately. Mutterings have been heard suggesting that low- and moderate-income people would be better off renting. A more outlandish claim uttered by some is that the reckless lending of the mid 2000s was not really reckless but “predatory borrowing” or consumers irresponsibly stretching their budgets and buying homes that were too large and extravagant.
Now comes along a new study by HelloWallet called a “House of Cards: The Misunderstood Consumer Finance of Homeownership”. HelloWallet describes its mission as democratizing financial advice and claims that 80 percent of Americans lack access to financial advice. According to its website, HelloWallet makes software that helps employers and employees work together to make financial decisions for employees.
HelloWallet’s study finds that more than one half of current homeowners, or 40 million homeowners, would have been better off financially by renting and investing. And the investing should include 401 (k) or Individual Retirement Accounts (IRAs). Hmm…if these millions of homeowners would rent, who would be their financial advisor?
HelloWallet runs a simulation for consumers across the country. For households, would they be better off renting or home owning? In the simulation, the net benefit of buying is the value of the home plus the tax advantage of owning minus mortgage debt and property taxes. If the monthly payments of owning a home is cheaper than renting, the savings is invested according to HelloWallet’s model. For renting, the net benefit is savings invested if cases where the monthly rent is cheaper than mortgage costs.
The methodology makes some sense in the abstract but then the reader does not see actual numbers for each variable but rather several assumptions about each variable. In addition, the assumptions likely add up to a model with poor predictive power. For example, the report assumes a down payment of 20 percent. However, several Manna home purchasers benefited from low down payment programs. Since down payments are a major cost, the prevalence of low down payments for borrowers in nonprofit programs means that HelloWallet’s down payment assumption will often produce incorrect conclusions for borrowers in nonprofit programs.
Another significant shortcoming with HelloWallet’s model is that it operates at a highly aggregated or national level and cannot account for localized variables. The duration of homeownership, the timing of home purchase, the particular neighborhood in which the home is located, and the terms of financing (responsible or abusive high interest rate loans) are all key factors determining the net benefits of homeownership. Some of these variables are talked about in a general way in HelloWallet’s paper but other variables are missed completely such as the terms of financing.
For Manna and other nonprofits, two key variables are the duration of homeownership and terms of financing. The longer a household remains a homeowner, the more likely the homeowner will benefit from homeownership. Nonprofits offering post purchase counseling are able to assist owners experiencing temporary crisis and help them maintain homeownership. Nonprofits can also guide borrowers through the lending process, making sure that they receive responsible and affordable loans.
Christopher Herbert and his colleagues at the Joint Center for Housing Studies at Harvard released a paper in September of 2013 that reviewed several studies concerning the benefits of homeownership. An informative discussion in the paper focusses on the difference between simulations like HelloWallet’s study and research based on survey data. Simulations often conclude that renting is better than homeownership because of the assumption that renters will invest every last drop of their savings in astute investment vehicles. In reality, however, most renters will not save and invest like crazy; instead, it is the chance to own a home that induces savings for a down payment.
Herbert and colleagues review several survey studies concluding that homeownership is beneficial for minorities and low- and moderate-income people. They then conduct their own econometric research, finding that even during the crisis from 1999 through 2009, homeownership enabled owners, including minorities and modest income owners, to accumulate equity.
It is true that homeownership is not for everyone and that is why Manna develops rental housing. And it is also true that homeownership’s tax benefits and the mortgage interest deduction is skewed to wealthy homeowners as HelloWallet asserts. Tax reform is in order. I would also agree with HelloWallet that people need to be careful using mortgage calculators when deciding whether to buy a home makes sense. These calculators often operate with incomplete data. Better to consult with a trusted advisor or reputable counselor. But the overall thrust of HelloWallet’s study was bombastic and self-serving. If done correctly, homeownership provides enormous benefits for minorities and modest income households.
Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.