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BARRIERS TO HOME OWNERSHIP
Term Paper ID:31164
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Considers the barriers to home ownership and programs that can help individuals buy homes.... More...
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Barriers to Home Ownership Introduction The American Dream is associated with home ownership A primaryresidence is the most expensive purchase that most Americans make and formost Americans it is also their single largest investment It is also along-term investment with home loans typically written for years andthere are significant tax benefits and benefits that accrue to theindividual the community and the economy as a whole Yet for all of itsimportance to the United States as a nation and for individuals thereexist significant
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The Federal Housing Administration (FHA)will guarantee loans for qualified buyers-generally first-time buyers, butalso borrowers making significant improvements to properties. In addition, continued home ownership means that additional homes willneed to be built. Interest rates directly affect the cost of home ownership separatelyfrom the purchase price of the home. Since the borrower is nowfinancing 1 percent of the home's purchase price, however, there isconsiderable risk if prices do not increase or, as happened in Californiain the 199 s, if prices decrease. This can extend to greaterparticipation in schools and greater participation in the community (Jones69). The median price of a single-family home in the United States reachedas high as $191, in June 2 4, an increase of more than $2 , fromJune 2 3. Interest Rate and loan BArriers Interest rates pose another barrier to home ownership in general,although low rates in recent years have not proved as significant abarrier. Recent developments havecaused there to be considerable barriers to home ownership, the mostsignificant of which may be the high prices relative to incomes. Aside from the high prices thatrequire higher monthly payments, high prices also increase the amount thatis needed for a down payment. Part of this is due to speculative buying,which is when homes are purchased with the expectation that they willappreciate such that the buyers can realize a significant gain. Theamount of the guaranty depends on the region in which the home is located;the highest loan amount in Orange and Los Angeles counties in California,for example, is $29 ,319, while it is only $16 ,176 in all of Arkansas.FHA will allow borrowers to put as little as three percent down and willfinance the remaining 97 percent, a factor which can greatly increase theaffordability of housing for some buyers. Without planning forincreases in the monthly payment, the homeowner could be in seriousfinancial trouble. Housing prices are alsoassociated with the same types of factors-including the quality of thecommunity-and ultimately, homeowners are concerned with the monthly paymentthat they will make on their mortgages since few home buyers pay cash fortheir homes. Unlike renters, who haveno long-term vested interest in their residences, homeowners are likely toengage in maintenance and upgrades as they continue to live in theproperty. However, the federal government and private lenders havedeveloped programs designed to help purchasers realize their dream ofbuying a home, and such programs are likely to continue until and unlessthere are a large number of borrower defaults. For homeowners who have a fixed rate mortgage; that is, their interestrate does not fluctuate on their mortgage, interest rates have littleeffect on their personal ownership once they have closed their loan. The difference of even one percentagepoint can be significant over the course of a 3 -year loan, and can makethe difference between a buyer qualifying and not qualifying for aparticular home loan. Home prices have increased significantly in recent years, particularlyin highly desirable markets. However, these smaller down payments can require mortgageinsurance, an issue that is discussed at length below. Bysome estimates, each $1 increase in real estate values results in an eightpercent (eight cents per dollar) increase in household spending. "Putting the Affordable Back Into Homeownership." Mortgage Banking 64(Apr 2 4): 19-2 . FHA does notactually fund loans, but guarantees loans made by local lenders. Since thatspending translates into additional economic stimulus, it is clear thathome ownership can be a strong engine for economic growth. "Fannie Mae Lends Less to Minorities." Winston-Salem Journal (Jun 1 , 2 3): D2.Robbins, John M. Thiscontrasts to an estimated two to three percent increase in consumerspending when stocks or bonds increase by $1 (Hershey C14). Lenders have also been creative in developing products that can helpborrowers obtain financing. Typically, lenders require 2 percent downfor mortgages, although some are willing to write mortgages with smallerdown payments. A primaryresidence is the most expensive purchase that most Americans make, and formost Americans, it is also their single largest investment. Thegovernment encourages home buying because of the economic benefits thathome ownership brings, and private lenders are eager to make home loansbecause they are relatively safe investments-if the borrower defaults, thelender can foreclose on the property and sell it in order to make back itsmoney. PMI can add as muchas $2 a month to a house payment, which may be enough to price theborrower out of the market. Homeowners who occupy their residences are also likelyto take pride in their neighborhoods. When ahome has no mortgage-that is, when it is paid off-homeowners can borrowagainst the property to obtain cash for other activities, such asinvestments or other purchases. This leads toincreased demand for plumbers, electricians and related workers as well asfor the supplies necessary to support their activities. "The Homeownership Gap." Black Enterprise 33(May 2 3): 27."Insurance Access, Premiums Barrier to Home Ownership." Westchester County Business Journal 42(Apr 7, 2 3): 26.Jones, Alan H. This increases the pressure to have a sizabledown payment in order to avoid the insurance requirement. Housing starts are a key economic measure, in large partbecause so many trades and companies are associated with construction.Housing is also an indicator of overall economic health since people aremore likely to commit to purchase housing when they are confident that theeconomy will remain stable and they will be able to support a mortgagepayment. "In Housing Sales, Frenzy is Giving Way to Balance." The New York Times (Dec 6, 2 4): C14."Homeownership Assistance Programs." Washington, DC: U. This is also in contrast to landlords, who receive directbenefit from not making additional investments that would increase theircost of ownership. However, as will be illustrated shortly, borrowers may find thatthey have less than 2 percent equity if prices drop. Ashome prices increase, it becomes more difficult for first-time homebuyersto provide that down payment (Mitchell D2). Depending on the housing market and the specific mortgage, ahomeowners' monthly payment can be less than a comparable rent payment.Unlike renting an apartment, however, purchasing a home provides the ownerwith equity and some measure of security. The Housing and Urban Development agency (HUD) administers a widevariety of programs designed to help low-income and first-time home buyersmake their housing purchases. When a mortgage is held against theproperty and it is the primary residence for the individual, there are taxbenefits. Home ownership also offers considerable security and peace of mind toindividuals. Once thepurview of the very wealthy or those who were purchasing second, third orrental properties, even first-time homebuyers are increasinglyparticipating in this speculative market. The price of a home can be particularly important for first-time homebuyers since mortgages require down payments of 2 percent. Ramberg. From third quarter 2 3 to third quarter 2 4, the averagehome price in the United States increased 12.97 percent, a rate of returnthat greatly exceeded that available through money market accounts,government bonds or certificates of deposit (Krainer and Wei 1). Thisspeculation has also served to drive up home prices since the addition ofspeculators to the market increases demand and thus puts upward pressure onpricing. Prices have recently begun to retreat somewhat, with the medianprice falling to $187, in October 2 4. In some cases, homebuyerspurchase houses for their primary residence with the expectation that thehome will appreciate without the homeowner having to invest heavily inrepairs or maintenance. In markets where prices have appreciatedsignificantly, such as California, borrowers have been able to eliminatePMI from their loans in as little as 12 months' time. This can be a formidable barrier forfamilies who are purchasing their first homes. Some of these barriersinclude the price of housing itself as well as insurance requirements andinterest rates or loan stipulations. Interestrates can also prove problematic to home buyers, as are insurancerequirements. S. However, even with the FHAguarantee, buyers must still meet the requirements of lenders("Homeownership" 1). Althoughfewer homebuyers are paying off their residences completely, it remains anoption that is unavailable to those who choose to rent (Hays, Morris andRamberg n.p.). Department of Housing and Urban Development (Oct 1, 2 4). However, increasing numbers of homeowners are using interest-only loans or adjustable rate mortgages that are directly affected bychanges in the interest rate. In most cases,this means that the borrower is putting less than 2 percent down on theloan. Adjustable rate mortgages move with theinterest rates-if rates fall, the homeowners pay a lower monthly payment.If rates increase, the monthly payment also increases. Ifinterest rates fall, they may choose to refinance in the future and lowertheir monthly payments. "Blueprint for an Ownership Society." Mortgage Banking 64(Jun 2 4): 68-72.Krainer, John and Chishen Wei. Conclusion Home ownership continues to be the goal of many Americans who considerhome ownership a necessary wealth-building step. Programs to Assist HOme buyers There are a variety of programs designed to assist home buyers. Recently, interest rates have been at historic lowsthat have helped fuel both demand for housing and the upward surge inhousing prices. Works CitedFrancese, Peter. Typically, homeowners are able to deduct the interest paymentsthey make for loan servicing from the federal-and often state-gross income;this reduces the tax liability for the homeowner. As already noted, homeowners who occupy their residences arelikely to engage in maintenance and upgrade activities. Homes that cost$19 , thus require $38, down in addition to other closing costsassociated with the purchase. For example, some lenders will write a so-called "split" loan in which 8 percent of the loan is written as a firstmortgage, with the remaining 2 percent written as a second mortgage. "House Prices and Fundamental Value." FRBSF Economic Letter 2 4(Oct 1, 2 4): 1-3.Mitchell, Kirsten. Rents can vary greatly depending on the type of dwelling that isbeing rented, its location, and the quality of the community, but rents areassociated with a single monthly payment. Pricing Barriers One of the primary barriers to home ownership is that of housingprices. This may have nothing to do with the loan amount, but instead isbased on market conditions. INsurance Barriers Private mortgage insurance (PMI) is typically required by lenders whenborrowers have less than 2 percent equity in their home. Borrowers withless than excellent credit may also be forced to purchase PMI as acondition of their loan, as well ("Insurance Access" 26). Benefits of Home ownership to Individuals Home ownership offers immediate benefit to individuals in that a homerepresents the single most valuable asset for most individuals. Loan barriers can be more problematic, since loan processors andofficers can erect barriers to borrowers that are both legal-such asrequiring very strong credit-and illegal, such as not funding loans forminority borrowers (Hughes 27). Thesecond mortgage is typically subject to a higher interest rate, but theborrower is able to avoid the PMI payments. Since interest rates-and hence the cost of loans-have beenlow, prices can increase without affecting the ability of consumers toqualify for loans. Typically, lendersdo not go back and force borrowers to obtain PMI if housing prices drop tothe point where homeowners lose their 2 percent equity stake. Benefits of Home Ownership to the Community "Pride of ownership" has considerable benefit to the community.Although this term is used to cover a variety of factors, it most often isassociated with the additional investments of capital and so-called "sweatequity" that homeowners make in their properties. To understand the consequences ofthese barriers, it is necessary to understand the benefits that homeownership brings to the individual, the community and the economy as awhole. Nonetheless, this is an increasinglypopular vehicle for borrowers (Robbins 19). The economic effect of home ownership is difficult to overstate. It is also along-term investment, with home loans typically written for 3 years, andthere are significant tax benefits and benefits that accrue to theindividual, the community and the economy as a whole. However, ifthe borrower tries to refinance, or obtain equity financing-such as anequity line of credit-that action might prompt the lender to re-appraisethe property and force the borrower to obtain PMI if there is less than a2 percent equity stake. "HUD's HomeWise Program." The America's Intelligence Wire (Jun 24, 2 4): n.p.Hershey, Robert D. Barriers to Home Ownership Introduction The "American Dream" is associated with home ownership. This provides a good rate of return without muchinvestment. Yet for all of itsimportance to the United States as a nation and for individuals, thereexist significant barriers to home ownership. In the event that the homeownerpays off the loan, the home is theirs without additional payments asidefrom property taxes and possibly other miscellaneous expenses. This research examines these benefits, and also considers some ofthe barriers that exist to home ownership in the United States today. The mortgage industry is one of the largest facets offinancial institutions in the United States, and so it is not surprisingthat the federal government and state agencies have assumed an active rolein assisting homebuyers. When housing pricesare already high, as is currently the case, and homeowners just barelyqualify for a home loan, having an adjustable rate mortgage during a periodof rising interest rates can prove disastrous. This assumes, of course, that thehomeowners are selling the first property in order to purchase the second. If the homeowner does not receive an increase in wages,or if the homeowners suffers a serious financial setback, the house itselfmight well be at risk and the owner could face foreclosure (Robbins 19). Since most of amortgage's payment is allocated to interest during the initial years of theloan, this can be a significant savings for most individuals (Francesen.p.). Retrieved 5 Dec 2 4 from <
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