Benefits of Homeownership Linked to Good Lending - Study

Contrary to the increasingly prevalent argument that the benefits of homeownership have been overemphasized, a new study by finds that it is still a good investment for low- and moderate-income households. But there is a caveat: The lending process must be done right, through responsible mortgage practices.

Michal Grinstein-Weiss and a team of researchers looked at a group of homeowners who got vanilla loans at a time where everyone else in similar circumstances were pushed into the subprime market. These vanilla borrowers subsequently reported higher net worth than a comparison group of participants who remained renters. Their findings are outlined in an article titled Is Homeownership Still a Sound Financial Move? published in the journal Housing and Policy Debate.

The research team used data from the Community Advantage Program (CAP) to compare a group of low- and moderate-income homebuyers with renters in the same income bracket. CAP provides traditional 30-year fixed-rate mortgages with predictable terms and sound underwriting to borrowers who would otherwise qualify only for subprime products. The team compared the experiences of these homebuyers and their renting counterparts on total net worth, total assets, total debts, total liquid assets, and total non-housing net worth.

The team's findings suggest that homeownership coupled with sustainable mortgages helped participants achieve greater increases in most of these variables than was reached by the renters.

Over the 3-year study period (2005-2008), the new homeowners reported an average increase of $15,000 in total net worth while renters reported gains of less than $11,000. The changes broke down to an increase in the new homeowners' total assets of $20,000 while their total debt grew by only $5,000. For the renters, total assets increased by one-quarter less ($15,000) and total debt increased by about the same as the homeowner group ($4,500). The homeowner group also showed greater gains in total liquid assets ($3,660) and total non-housing net worth ($3,036) than the amount of increases reported by renters.

Grinstein-Weiss says the study "is not offering homeownership as a panacea for poverty or suggesting homeownership is a 'one-size-fits-all' solution to increasing household savings." Rather the researchers view their results a way to inform policies to promote homeownership as a strategy for such households to build wealth. "Our findings do not argue that all homeownership is beneficial," the author says, "but rather that lower-income homeowners who have access to mortgages that are carefully underwritten with responsible terms, including low upfront costs and low interest rates - or what we like to call 'responsible mortgages' - can experience increased financial security and independence.

Grinstein-Weiss says the findings are particularly noteworthy because data was gathered during the Great Recession when the housing market downturn had the greatest effect on low- and moderate-income households. Yet those very households in this study experienced increases in net worth. "Maintaining a financial balance during the Great Recession would have been noteworthy in itself, but the substantial increases in net worth among this group of new homebuyers are particularly remarkable. Indeed, this study suggests that homeownership can be a pathway to financial security."

The potentially problematic factor of ongoing price appreciation during the first two years of the study was not addressed, nor was the fact that values were still on the way down in 2008.  Still, proponents of homeownership benefits espouse the notion that a home is the one investment in which you can sleep, eat, and raise a family. Whereas paying rent guarantees a place to sleep, paying a monthly mortgage eliminates a portion of the principal of the loan, reducing debt, and potentially increasing net worth. A March 2013 survey conducted by JP Morgan Chase found that the dream of homeownership lives on; 87% of its respondents still hope to own a home one day.