Improving Homeownership Among Poor And Moderate-Income Households

Brief #2 in the series Opportunity and Ownership Project

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Asset ownership is vital to households seeking to expand opportunity, solidify family finances, and hedge against economic uncertainty. No asset is more important in achieving these objectives than owner-occupied housing.¹ Indeed, home equity is the primary source of private saving for most middle-income households, exceeding both retirement plans and savings accounts.²

While 69 percent of all households are headed by homeowners—a record high reached in 2004—many are left out. Only half of the households in the lowest fifth of the income scale are homeowners, and the homeownership rates among both blacks and Hispanics are slightly under fifty percent.

Of course, homeownership is not for everyone. Some families have unstable monthly incomes and few liquid assets. When these families face an income loss, they may be unable to meet mortgage payments and could face foreclosure. For such families, renting may be more economically sensible. Renting may also be the best option for families that expect to move frequently.

However, these exceptions do not excuse the strong disincentives to homeownership created by existing policies, which often cut off public benefits for those who own. U.S. housing programs that account for the bulk of housing assistance to low- and moderate-income households, by their design, discourage ownership of housing.

The bulk of housing assistance is delivered through favorable treatment under the federal individual income tax. This favorable treatment comes in three parts. First, unlike owners of rental housing, homeowners do not include in their taxable income the equivalent of the rent money they save by owning a home. Except for individuals and families who do not have taxable income, all homeowners therefore pay lower taxes as a result. By comparison, saving that takes place in a fully taxable asset, such as a savings account, is not directly sheltered from tax. However, the second part is that homeowners who itemize on their taxes can deduct their mortgage interest payments and property taxes from their taxable income—these tax deductions effectively cancel out the tax homeowners would otherwise owe on fully taxable interest-bearing assets like a savings account. Third and finally, homeowners are usually not taxed on the capital gains from the resale of their homes.³

The wealthiest households receive the greatest benefits from these tax provisions because they have higher homeownership rates, occupy more expensive housing with bigger mortgages, and are more likely to itemize their tax deductions. For these reasons, their income for tax purposes is understated to a greater extent than the income of poorer households. Also, as the wealthy have higher marginal tax rates, these exclusions from income lead to larger tax savings. Low- and moderate-income homeowners receive smaller benefits from these tax provisions because the untaxed return to savings in their homes is smaller, fewer of these households itemize, and their low or zero marginal tax rates yield modest or no tax savings.

All this means that any real attempt to create an "ownership" society by expanding asset ownership among those with modest means must confront housing policy head-on.

Notes from this section

1. See, for example, Di, Yang, and Liu 2003 and Sinai and Souleles 2003.

2. Based on our own tabulations of wealth using the 2001 Survey Of Consumer Finances; and Di 2003.

3. Assuming the sellers lived in the home (as opposed to renting it out) for two years out of the prior five years. See IRS Publication 523 for details.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.