Consider This from NPR - How Buying A Home Became A Key Way To Build Wealth In America

Episode Date: January 3, 2023

High mortgage rates and a low supply of homes for sale has made homeownership feel out of reach for many Americans. And yet it remains an important way for Americans to build wealth.We speak with Chris Herbert, with the Joint Center for Housing Studies at Harvard University, about how homeownership became such an important part of the American Dream, and about other ways to build wealth.In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community.Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This message comes from Indiana University. Indiana University performs breakthrough research every year, making discoveries that improve human health, combat climate change, and move society forward. More at iu.edu forward. The housing market went through a lot last year. Last May, median home prices hit record highs, building on a pandemic-fueled spike in demand for homes. But then came inflation and the Federal Reserve's decision to hike up interest rates to fight it, which suddenly made home buying even more expensive. Monthly mortgage payments for a typical home are now nearly $1,000 higher than they were at the start of the year. Nationally, most economists think, okay, prices might fall a bit. Some say 10% from the top peak, maybe a little more, but not a crash. Homes are selling on average in just 19 days. That's really fast. So even with higher rates

and fewer sales, there still just aren't enough homes and they're selling quickly. Today, mortgage rates are still hovering above 7%. Here's how Daryl Fairweather, a chief economist at Redfin, describes what's been going on. What we're experiencing now is like a hangover from this party in the housing market that was going on for the last two years. And that party was fueled by cheap debt from the Federal Reserve. And now inflation is ending the party. With mortgage rates high and the supply of homes at historic lows, many potential buyers are left feeling pessimistic. I guess I've been discouraged

about the prospect of becoming a home buyer. Yeah, I wonder if that is something that I still want to do. Rebecca Bush is 27 years old and lives in Tennessee. She was looking for a home last year, but couldn't compete against buyers offering cash above asking price on homes she looked at. So right now, she's making do in her basement studio apartment. I'm sitting in my living room and I can see my closet, which is what I use as an office, and I can see my kitchen and my bed. So it's all in this one room. Bush grew up on a 60-acre farm, so she always imagined she'd have a place of her own one day, a place big enough to welcome people into and maybe have a few farm animals of her own. But right now, she doesn't see how she can afford that. I just kind of wonder if I need to figure out a different place to build wealth. Is it not in a home? I think ultimately, I still have that dream that maybe I will be able to buy a home. But right

now, I'm trying to be open to the idea that maybe there's something else out there for me. Mariah Rogers also had to rethink her housing plans. Rogers is 50 years old and works as a real estate appraiser. She had been living in California, but as a single parent to four children, home prices in that state were out of her budget. So she moved to Alaska where three of her children were born. She thought maybe there she could afford the home she wanted for her family. But that wasn't exactly the case. It was really difficult to hold back because that American dream and the idea of seeing your kids run into their bedroom. And, you know, it's a really an emotional thing. And, you know, the idea of a backyard with a trampoline, plenty of place to play or,

you know, a dog. I had to really find that this is not an emotional purchase. I had to bring it back to the core roots, which is if the numbers don't make sense, they don't work. She ended up buying a 600 square foot one bedroom condo. A closet has turned into beautiful bunk beds that look like they're from a children's book for the two little ones, the four and the six year old. So every time they go to bed at night, they feel like they're climbing

into their own little fort in a way. And it's the same for the 12 and the 13 year old is the room is large enough that I've separated it in a way that they each have their own completely private space. Rogers herself sleeps on a fold-out sofa in the living room. It's not the spacious home she might have imagined. But it is my own little slice of pie, and of the American dream,

and it's a beautiful, beautiful slice, that's for sure. Consider this. A tight home market and high interest rates have left some people feeling like home ownership is out of reach, at least for now. But owning a home is still a cornerstone of the American dream for many and a key way to build wealth in America. From NPR, I'm Juana Summers. It's Tuesday, January 3rd. This message comes from WISE, the app for doing things in other currencies.

Send, spend, or receive money internationally, and always get the real-time mid-market exchange rate with no hidden fees. Download the WISE app today or visit WISE.com. T's and C's apply. It's Consider This from NPR. For many Americans right now, buying a home can seem out of reach. Home prices and interest rates are high. The supply of homes for sale is low. So they're holding off. That's one reason home sales are down in recent months.

But homeownership remains one of the main ways Americans can build wealth throughout their lifetimes. So how did we get here? I spoke to Chris Herbert. He's managing director of the Joint Center for Housing Studies at Harvard University. Well, homeownership has been a central way of building wealth, I would say, certainly all throughout the post-war period. The wake of World War II, when the suburbs opened up. Although I would say, importantly, it was not an avenue that was open to many people of color, particularly African Americans. And so while homeownership has long been an important source of wealth creation for whites,

that hasn't been the case for Black Americans. Because you brought that up, I'd just like to ask you, do you have a sense, or are you able to break down what the racial demographics of home ownership are today? Well, today, about 73% of white households own their homes, where that rate is 43% for black Americans. And so there's about a 30 percentage point gap in the home ownership rates between white and black households. For Hispanics, the gap is somewhat smaller. Hispanics own homes at about a 47% rate. So the gap's a little bit smaller, but still substantial. So the difference between white households and black and Hispanic households and the opportunities to own a home are substantial. What is it that is continuing to fuel the racial wealth gap when it comes to home ownership?

Well, one important piece of it is that historical pattern of owning and the fact that because people of color didn't get to own homes at the same rate in the 50s and 60s, and importantly, many times the pattern of racial segregation meant that people of color were living in neighborhoods that over time have been subject to disinvestment and have not appreciated as much, is that people, black and Hispanic households today, don't have as many parents who were homeowners. And that intergenerational transfer of wealth is an important means that people today are able to put down a down payment to be able to buy a home. So one big reason that we have such substantial gaps in

homeownership today is it's a reflection of the significant gaps we had a generation ago. You know, if you think back to the 1950s, there were almost ideal conditions for a spike in homeownership. A housing boom and rising incomes meant that many Americans were suddenly able to buy homes. But, you know, the landscape today just looks really different. More and more Americans, especially younger adults, are now worried about their ability to buy a home, certainly right now, but perhaps ever. Can you talk to us some about the factors that are making home ownership today so challenging for so many people out there? Well, you know, a big reason why it's so much more challenging today is just housing is so

much more expensive relative to incomes than it was back in the 1950s. And there's several reasons for that. One is back in the 1950s, we had wide open spaces on the outside of central cities where the suburban areas that were being opened up by the new interstate highway system that made large areas of green space available for development that made it cheap to build whole new subdivisions of housing. And so we don't have that situation today. Most places are largely built out. If you want to find green space to build, you've got to go way out from central cities. And the other big difference between now and the 1950s, too too is that obviously we have a lot more regulation to control development so it doesn't have the environmental impacts that we

are concerned about. We have a lot more impact fees that are leveled to pay for infrastructure that we had back in the 1950s that was largely paid for through either federal or state tax revenue. So the availability of land, the degree of regulation, and many times needed regulation to control for environmental damages, makes it much more expensive to build housing today. And we've mentioned that homeownership has been considered for a long time to be the main path to building wealth in the United States. So if we were to compare renters to owners, how do those two groups compare when you think about personal wealth? If we look at the wealth difference between homeowners and renters, it's substantial.

Homeowners have many times the wealth of renters, and it's for two reasons. One is that just the fact that someone owns a house, they're going to have an advantage over renters. Homeowners tend to have higher incomes. They have higher savings for other investments, such as retirement accounts as well. So the difference in wealth between homeowners and renters is not just homeownership, although that's a really important piece of it. You know, and this leaves me thinking about all of those people who aren't homeowners. We've heard from many people who can't afford to buy a house right now and who are not entirely sure what to do with their money. In the meantime, what are ways that people can continue to build wealth if they are unable to purchase a home right

now? The principal way in which people generate wealth or get a high rate of return on their savings is through investments in financial instruments, stocks and bonds, mutual funds. Many people have access to that through their jobs. And so individual retirement accounts of various forms are a really important way of saving. You can put your money aside and you'll earn a decent rate of return from that. And in fact, renters can do well if they are able to put money into those financial instruments. The rate of return on stocks and bonds over the long term has certainly been higher than the rate of return on homeownership. It's been quite a struggle for many people across the country over these last few years who are trying to buy a home because of the pandemic, rising interest rates, the low supply of new homes. But I'd like to ask

you if you see any reason for optimism right now. Are there ways that the housing market is improving for people? If I were looking for reasons for optimism, I would say one is that we're probably in the darkest days now. The Fed has helped put the damper on house price growth. Interest rates should come down over the next two years. And so hopefully we'll be in a situation where we won't see house prices inflating at such a high level and interest rates will have moderated. The other reason for optimism, I would say, is that from a policy perspective, there's a lot of attention being paid to this issue right now. And I think that's leading policymakers and folks in the housing industry, and that includes lenders and realtors and builders who see good reasons why we should be expanding homeownership opportunities are looking for ways to do that, looking for ways to

provide new forms of credit and other supports to make homeownership accessible to people. Before I let you go, I just want to ask you, big picture, what do you think needs to be done in order to keep improving accessibility to homeownership in this country? There's a few ingredients. One is people have to know about the opportunities and know what it takes to qualify for homeownership. So we actually spend a fair amount as a country on homebuyer education and counseling. And a lot of this work is also done through realtors and lenders. And so we certainly need to make a concerted effort to make sure that consumers are well-informed, both about the opportunities and the ways in

which they can make good decisions. Secondly, we need to have access to fair, safe, and affordable mortgage products. We need to be able to accommodate the fact that people of color in particular have less wealth, so they'll have less of a down payment, that they may have more impaired credit because they didn't have the access to payments for college, so they were subject to higher student loans and the like. So we need to have more flexible credit terms on mortgages to extend credit to people who actually are good risks. And lastly, we need to have targeted subsidies. As I mentioned, a lack of wealth, a lack of historical family wealth is a

big barrier to homeownership for people of color. So we need to expand access to down payment assistance programs that give people help with that wealth you need to come to the closing table with that they don't have families they can help with. So better information, access to good credit, and more targeted subsidies will go a long way to helping move the needle on homeownership opportunities. That was Chris Herbert, Managing Director of the Joint Center for Housing Studies at Harvard University. You heard additional reporting in this episode from NPR's Brianna Scott. It's Consider This from NPR. I'm Juana Summers. This message comes from Indiana University. Indiana University performs breakthrough research every year,

making discoveries that improve human health, combat climate change, and move society forward. More at iu.edu forward.