Addressing Housing Affordability with Access to Homeownership

Faced with an affordable housing shortage, policymakers often overlook America’s biggest source of affordable housing: homeownership.

Client photos courtesy of Homewise, inc.

Contrary to popular belief, owning is often more affordable than renting. Today, it is cheaper to buy a home than it is to rent in two-thirds of US counties, including New Mexico’s Santa Fe and Bernalillo Counties, home to high-cost Santa Fe and moderately priced Albuquerque, where Homewise, has helped more than 5,000 modest-income families become homeowners.

Nevertheless, some believe homeownership is reserved for people who achieve some level of financial success, that it’s not for people still on the path to financial security. This may explain why most federal, state, and local efforts to create more affordable housing narrowly focus on the rental market.

However, the data disprove this thinking. The typical homeowners spend 10 percentage points less of their income on housing than the typical renters.

This remains true when controlling for income. Among households with annual incomes of less than $50,000, renters spend an average of 34 percent of their income on housing, but owners spend only 24 percent. Similarly, for households earning less than $20,000 a year, homeowners spend 38 percent of their income and renters spend 48 percent.

The lower cost of owning also holds true when controlling for race and ethnicity. Though Black and Hispanic homeowners have higher housing expense ratios than white homeowners, they have lower housing expense ratios than all renters, including white renters. The median housing expense ratio for Black and Hispanic homeowners is 19 percent, and the typical white renter household spends 24 percent of its income on housing.

I’m not suggesting homeownership alone can solve the housing affordability crisis. But strategies focused only on rental housing can be shortsighted, especially when homeownership may be more cost-effective for all involved. Many rental programs, including housing choice vouchers, require the government to send monthly assistance to a landlord who is under no obligation to renew a tenant’s lease.

In comparison, homeownership can provide the kind of affordability and stability low-income families need. Here’s how.

The Average Monthly Mortgage Payment is Less Than the Average Monthly Rent

In November 2020, the Zillow Home Value Index estimated the median US home value was $263,351. If a homebuyer financed 100 percent of their home purchase, their monthly mortgage payment would be $1,464 (assuming a 30-year fixed-rate mortgage at a 3.5 percent interest rate, with taxes and insurance estimates from the 2019 American Housing Survey).

At that time, the Zillow Observed Rent Index found the median monthly rent was $1,734, meaning the average renter paid $270 more per month than the average homebuyer.

Mortgage Payments are Generally Stable, But Rents Tend to Rise

Increasing rents and home prices do not affect renters and owners the same way. Whereas renters are continuously vulnerable to cost increases, rising home prices do not affect current homeowners’ costs.

Over time, owning and renting produce starkly different economic outcomes. Homeownership’s major affordability benefit is that it stabilizes what is likely the household’s biggest monthly expense, assuming a buyer has a fixed-rate mortgage. The only potential changes in homeowners’ housing expenses are taxes and insurance. The principal and interest payment stays the same for the length of the loan.

The Cost of Owning as a Share of Income Almost Always Declines Over Time

In general, incomes, rents, and other expenses increase over time in relationship to the overall inflation rate, but not typically all at the same rate. If rents increase faster than wages, the renter’s housing expense ratio increases. If wage increases outpace rent inflation, the renter’s housing expense ratio decreases.

By comparison, if a homeowner’s wages increase at the same rate as inflation, their housing expense ratio decreases because only taxes and insurance are subject to inflation. The biggest part of their housing expense, the principal and interest, is constant. Even though the renter’s and the homeowner’s costs increase, the homeowner’s costs increase less. Annual increases in housing costs will almost always grow faster for renters than for homeowners.

Homeowners’ Housing Expenses Decline Over Time in Absolute Terms

Owning a home not only becomes more affordable relative to income, it also becomes more affordable in absolute terms. The homeowner’s real housing expenses decline over time because the principal portion of the mortgage payment is not really an expense. Instead, it builds the homeowner’s equity. And unless tax and insurance increases rise faster than the interest expense falls, the true housing expense decreases over time.

Put another way, ownership capitalizes on the power of buying a home by converting a portion of what would otherwise be 100 percent consumer spending (renting) into a combination of consumer spending and investment. And it does so without additional resources. The home buying investment simply converts some portion of an existing expense (renting) into an investment in real estate.

Homeownership’s “Affordability Big Bang”

The final meaningful financial benefit of homeownership is what I call the “Affordability Big Bang.” After a homeowner makes their final mortgage payment, all that remain are tax and insurance costs. The owner’s housing expense drops precipitously, often just in time for retirement, when incomes also often decline.

Homeownership Can Be Affordable Housing

If the nation is committed to helping all Americans achieve affordable, stable housing, we must do more to help low-income families and families of color own their own housing. Affordable homeownership is not the capstone of economic well-being; it is the cornerstone. And increasing access to homeownership would also help close the racial wealth gap. If America is going to effectively address its affordable housing crunch, as well as its racial wealth gap, policymakers will need to prioritize increasing access to homeownership—access that will foster financial stability and mobility for millions of Americans.

This post originally appeared on Urban Wire, the blog of the Urban Institute

Article by Mike Loftin, who has served as the CEO of Homewise, Inc. since 1992. Homewise is an effective nonprofit social enterprise, promoting sustainable homeownership in a way that improves the long-term financial well-being of modest-income families. Loftin led the creation and implementation of Homewise’s comprehensive business model that seamlessly integrates all the steps of the home purchase process. Fiercely focused on the long-term success of every homeowner, Homewise sustains an over-30-day delinquency rate that is less than 2 percent, compared with the Federal Housing Administration’s rate of more than 9 percent. Homewise has become New Mexico’s sixth-biggest mortgage lender and covers all of its operating expenses from earned revenue. Loftin drafted and led the campaign to pass Santa Fe’s inclusionary zoning law, which has been used as the model for similar ordinances adopted by other municipalities.

Previous to his work at Homewise, Loftin was a community organizer in Chicago, and his achievements included founding the Resurrection Project, a preeminent Chicago community-development organization serving several Mexican-American neighborhoods; organizing an antidisplacement campaign in Chicago’s Uptown neighborhood during his tenure with the affordable housing organization Voice of the People; and leading the Metropolitan Tenants Organization in the passage of Chicago’s Tenant Bill of Rights.

Loftin currently serves on the board of Excellent Schools New Mexico, served on the board of the University of New Mexico Anderson School of Management Foundation, and was a governor-appointed board member of the New Mexico Mortgage Finance Authority. Loftin holds a Bachelors in History from Northwestern University.