Homeownership Not Always Best Option for Low Income Families

Economic Realities Point to Renting as More Viable Choice

For Immediate Release: January 11, 2005

Contact: Debi Kar, 202-387-5080

The coming burst of the speculative bubble in the housing market and its implications for all American homeowners highlights the serious need for more balanced housing policies that take into account the merits of both homeownership and affordable rentals. A new report from the Center for Economic and Policy Research (CEPR) entitled “Who's Dreaming? Homeownership Among Low Income Families” by Dean Baker, finds that the economic realities facing low-income families make homeownership a less desirable housing option.

“Homeownership should not always be viewed as the primary housing option for low-income families,” says CEPR economist and co-director Dean Baker. ”Affordable rentals may make more sense given the economic realities confronting low-income families.”

Two main factors that make homeownership desirable for middle-income families are less relevant to low-income families. These factors are the lack of tax benefit from the mortgage interest tax deduction given little or no income tax liability for low-income families, and the high transaction costs from buying and selling that have a greater impact on low-income families who have a low median homeownership period of just four years.

The recent run-up in home prices in many parts of the country makes it unlikely that homebuyers (including low-income homebuyers) will experience capital gains when they sell their homes. In fact, it is likely that in many bubble-affected regions, low-income homebuyers will actually sell their homes for less than what they paid, after adjusting for inflation.

The potential capital losses for the typical low-income homebuyer relative to renting could range between twenty-five percent of their total rent over the four-year median period of homeownership to an amount approximately equal to the total cost of renting over the four-year period.

While a longstanding goal of public policy has been to increase the national rate of homeownership, there is reason to question the merits of recent efforts to expand homeownership among low-income families, such as the American Dream Act, which provides down payments to qualified low-income families. Because of the realities confronting low-income families, many such families may be made worse off by becoming homeowners instead of renters. In such cases, government subsidies for homeownership may aid real estate intermediaries at the expense of the families they are designed to help.