Homeownership has several key features that make it attractive as a wealth-building tool. Homeownership carries financial risks for individual households Current homeownership subsidies-particularly the mortgage interest deduction-are poorly designed to achieve social goals. The nation’s historic reliance on homeownership for wealth-building creates risks for individual households and exacerbates the racial wealth gap. Providing greater public support for alternative wealth-building strategies is not intended to discourage homeownership, but rather to complement it and to address its limitations. But relying on homeownership as the primary source of wealth has inherent riskiness for households, and continues to drive the wealth gap between Black and white households.Ī more balanced national approach to wealth-building should emphasize three types of strategies: encouraging short-term, liquid savings through employer-matched savings programs replacing the current mortgage interest deduction with a targeted first-time homebuyer tax credit and providing subsidies for longer-term asset-building through individual development accounts (IDAs) and child development accounts (“baby bonds”). For households in the three middle-income quintiles, home equity is the largest single financial asset, representing between 50% and 70% of net wealth (Figure 1). has primarily relied on homeownership as a strategy for middle-income households to build wealth.
According to the 2019 Survey of Consumer Finances, the median white family had eight times the wealth of the median Black family, and five times the wealth of the median Latino or Hispanic family. The wealth gap between non-Hispanic white households and Black households is large and persistent. Wealth-or the lack of wealth-is not distributed evenly across all households. As of 2019, 40% of households could not pay for a $400 emergency without borrowing-let alone withstand several months of a broad economic slowdown. Having at least some readily accessible savings allows people to meet unexpected financial demands: the loss of a job, an urgent health care need, or everyday occurrences like home and car repairs. households had almost no financial cushion. An employer-matched savings account- similar in operation to 401(k) programs-would encourage households to build readily available, liquid savings for short-term needs.Įven before the COVID-19 pandemic, too many U.S. Federal subsidies for individual development accounts (IDAs) and child development accounts (sometimes called “baby bonds”) would make substantial progress toward closing the racial wealth gap, while enabling families to save for longer-term investments.
Replacing the current mortgage interest deduction with a first-time homebuyer tax credit targeted at moderate-income households would be less costly and more progressive than current policy. These alternative strategies would not replace homeownership, but instead overcome the limitations of homeownership, especially by providing greater liquidity and diversification. Moreover, because of racial discrimination in housing and mortgage markets over many decades, a reliance on homeownership continues to exacerbate the wealth gap between Black and white families.Ī more balanced set of policies could both increase financial security (particularly for low- and moderate-income households) and shrink the racial wealth gap. Specifically, housing is not diversified or liquid, and the returns on investment vary widely across geographic markets and timing of purchase. While homeownership can be an effective asset-building mechanism, it also poses some financial risks to households. has relied on homeownership-subsidized through federal tax policy-as a means of wealth-building.
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