As it turns out, the American dream of owning a home is not the best option for everyone, according to a study released by the Center for Economic and Policy Research. Some low-income families may even be worse off from a home purchase, losing a substantial amount of money in the process.
Even with subsidies from government programs like the American Dream Act, many low-income families would be better off renting, writes Dean Baker, co-director of the Center and author of the report, “Who’s Dreaming? Homeownership Among Low Income Families.”
“Government programs that push low-income families into home ownership are likely to benefit Realtors, mortgage brokers and other intermediaries, rather than the families who are the targets of this aid,” Baker writes.
It is important to recognize prospective home buyers’ individual situations, as well as the state of the housing market when deciding whether home ownership would be more beneficial than renting, Baker cautions. Factors like tax benefits that make owning attractive to middle-income families may not apply to low-income families who have no income tax liability.
“Almost by definition, low-income families will owe no income tax because they are below the thresholds where they first become liable for income tax,” the study notes. Most low-income families won’t receive a benefit from the mortgage interest payment tax deduction.
Low-income is defined as below 80 percent of the median income nationwide, which equals an income of less than $43,000 nationally.
Another factor working against low-income families is the length of time a typical family will occupy their home. For families in this income bracket, recent research shows that the median low-income home buyer stayed in the home for less than four years. That means the transaction costs incurred from buying the home will be “quite important relative to the cost of living in the home.”
Baker, who has examined the run-up in home prices and possibility of a housing bubble in previous papers, cautions that home buyers are unlikely to earn a capital gain because it’s not safe to assume that home prices will continue to rise through time. He points especially to areas where price increases have exceeded inflation by more than 50 percentage points over the last nine years, primarily California and the east coast north of Washington, D.C.
Low-income buyers in those areas could end up with a large loss, he writes.
The assumption that “home prices will rise through time, is questionable in general (especially for low-income families), and especially dubious in a period in which housing prices have been inflated by an unsustainable bubble,” he writes.
Finally, even with the help of government subsidy programs that provide up to 6 percent for down payments for qualified borrowers, low-income home buyers end up losers, the study shows. Baker shows how one of these down payment gifts equaling 5 percent of the home purchase price is divided among the home buyer, mortgage brokers and Realtors.
The revenue going to mortgage brokers amounts to 60 percent of the government subsidy, and the assumed 6 percent of the sale price going to the real estate agent equals 120 percent of the government subsidy, according to the study.
“In short, the intermediaries to the transactions end up receiving an amount that is far greater than the size of the subsidy. The government’s money goes entirely to these intermediaries, and the homeowner is left worse off than if they did not get the subsidy and remained as renters,” Baker writes.
“Given these circumstances, home ownership is likely to be a losing proposition for many low income families.”
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