The blog of the Urban Institute
February 14, 2020

Beto O’Rourke’s Idea to Boost Homeownership by Building Savings Is Worth a Second Look

February 14, 2020

Many Democratic presidential candidates have released housing plans that include strategies to expand access to homeownership. Several of those strategies aim to make down payments more affordable.

Although his candidacy has ended, Beto O’Rourke is still the only 2020 presidential candidate to propose boosting homeownership by injecting cash into Americans’ savings accounts through a matched savings program.

What was in the plan?

The plan included an ambitious nationwide matched savings program offered through the US Postal Service that would better position millions of low- and moderate-income people to become homeowners.

The policy would offer a 2:1 match on up to $1,000 of savings per year ($2,000 for married couples), and participants could receive a $10,000 maximum lifetime match ($20,000 for married couples). Eligibility would be restricted to nonhomeowners whose aggregate income is below 400 percent of the federal poverty level.

Why boost savings to boost homeownership?

Boosting Americans’ savings might not seem like it belongs in a housing policy, but the ability to afford a down payment remains a key barrier to homeownership for many Americans, especially those who have not received financial support from family members.

The policy could be particularly useful for young adults, especially those of color, who are working to achieve financial independence. We estimate that 15.5 million nondependent adults ages 18 to 35 would be eligible for the program nationwide. These are nonhomeowners who are either the head of the household or their spouse and whose family income is below the limit. About 20 percent of all 18-to-35-year-olds in the country meet that criteria. About 28 percent and 23 percent of Black and Latinx 18-to-35-year-olds, respectively, would be eligible.

Based on new evidence from randomized controlled trials (RCTs), we estimate that this policy would move about 731,000 18-to-35-year-old nonhomeowners to homeownership three years after the policy was implemented.

How could this address disparities by age and race or ethnicity?

Increasing low-income young adults’ ability to purchase a home is an important part of closing the racial and generational wealth gaps.

The homeownership rate for millennials is 8 percentage points lower than for previous generations ages 24 to 34. Millennials are also more likely have lower credit scores, be constrained by student debt, and have low incomes after the Great Recession.

Early interventions to enable home purchases can come with big benefits, as the age of first home purchase is correlated with future housing wealth.

Black and Latinx people were hit hardest by the Great Recession and have experienced slower recovery. They also are less likely to receive large gifts and inheritances than white people. Closing the racial wealth gap requires putting more wealth-building options on the table.

Comparing the results of a similar proposal

Our estimates draw on RCT evidence that shows that matched savings programs have powerful impacts on wealth building, even for people with low incomes.

The Assets for Independence (AFI) program, a federally supported individual development account program that offered direct matches on withdrawals for approved asset purchases, was last funded in 2016. Randomized experiments found that the program increased the homeownership rate 52 percent among participants who were not already homeowners at study enrollment.

Most AFI participants were younger than 40 and were predominantly people of color, similar to the target demographic of O’Rourke’s policy.

Our estimates assume that the impact of both programs would be similar, but there are some differences between the two approaches:

  • AFI had different eligibility requirements than O’Rourke’s proposal. To be eligible for AFI, participants also had to be eligible for the Temporary Assistance for Needy Families program or earn less than 200 percent of the federal poverty level and have a net worth of less than $10,000, excluding their primary residence and one vehicle.
  • AFI also required that withdrawals be approved for an asset purchase. O’Rourke’s plan did not specify what restrictions withdrawals would be subject to.
  • The AFI program also incorporated services like financial coaching that helped participants make safe asset purchases. O’Rourke’s plan did not specify whether financial coaching would be required or offered.

There is a chance that without these features of AFI, the effects of O’Rourke’s plan on homeownership could be smaller (or larger). More evidence is needed. We also do not know what effects to expect beyond three years. Young adults may be considering becoming homeowners 10 or 15 years from now.

Homeownership isn’t the whole story, and it isn’t right for everyone.

Matched savings programs, depending on their restrictions on withdrawals, help people save for many kinds of major asset purchases, not just down payments on homes.

For example, AFI increased business ownership among non–business owners and decreased participants’ overall reported economic hardship .

Pairing matched savings with financial coaching could also help young adults set financial goals and determine whether they are prepared for homeownership.

It is also worth noting that without an appropriate supply of affordable options on the market, increasing the home purchasing power of so many Americans could push prices up, negating some of the program’s desired results. Additionally, research has not yet weighed the costs of such a program against alternatives aiming for similar impacts.

That said, if other presidential candidates are interested in policies that make homeownership more attainable, they should consider the potential impact that directly matching savings on a large scale could have on widespread financial well-being.

Ricardo Romero (R) gives Beto O'Rourke a tour of the premises of the Jovenes Youth Shelter in Los Angeles, California on October 4, 2019. Photo by Frederic J. BROWN / AFP via Getty Images.

 

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