Homeownership is a critical wealth-building tool for families. It can protect against the risks of sudden rent increases, limit hardship during economic downturns, and provide a sense of ownership and commitment to people’s property and community. But homeownership continues to be out of reach for many Americans, and the wide racial homeownership gap has persisted for decades.
Only 53 percent of Black household heads owned homes in March 2020, compared with 78 percent of white household heads, according to the US Census Bureau’s Current Population Survey. The racial homeownership gap is lower but still substantial among married households (70 percent among Black households and 85 percent among white households). Racial discrimination in lending and the labor market, residential segregation, and exclusionary zoning restrictions contribute to Black families’ lower homeownership rates and to the broader wealth gap between Black and white families.
As the Biden administration aims to improve racial equity, increasing Black wealth and homeownership will likely play an important role. One potential vehicle for doing so could be to incorporate a substantial role for homeownership in Biden’s proposed expansion of the Housing Choice Voucher (HCV) Program, which is currently used almost entirely to support renters. Because Black families receive nearly half of all HCVs, leveraging this program to promote homeownership for voucher recipients could promote equity for Black families.
Some places, like Pittsburgh, have explored using homeownership vouchers, but only about 1 percent of the nation’s current vouchers go toward homeownership. Understanding why housing authorities rarely use vouchers for homeownership is critical. Expanding the homeownership component of HCVs could involve allowing for higher administrative costs, liberalizing various regulations, increasing housing authority flexibility, and experimenting with incentives that align with long-term budget and wealth-building objectives.
How a homeownership voucher expansion could work
HCVs pay the difference between the actual rent—up to the fair market rent (FMR), set at the 40th percentile of area rents—and about 30 percent of the family’s income. HCVs, public housing, and other federal programs are significant for many families, but they currently cover only about one in five eligible families—a problem Biden has proposed addressing with his proposed HCV program expansion.
But rather than focus only on rents, that expansion, along with additional supportive services, could also assist families in becoming homeowners. Under this plan, maximum monthly homeownership vouchers could be set at fair market rent or the carrying cost of a home at the 33rd percentile of home values, whichever is lower. Recipients would continue to pay 30 percent of their income to offset government costs.
A specially created fund could finance modest down payments with some contribution from the recipient. Alternatively, half of the principal component of the first five years could be used to pay back the down payment support. Homeownership vouchers could also mitigate the risks faced by lenders because the government would guarantee full payment if the owner’s income falls sharply.
As under current regulations, eligible homeowners would have to complete the housing authority’s homeownership and housing counseling program. To help homeowners maintain their properties, localities could add features such as designating a housing consultant and a team of local craftsmen to be on call for maintenance.
In many places, providing homeownership vouchers for current recipients could cost the government less than providing rental vouchers
Housing market conditions and mortgage rates dictate whether homeownership vouchers would save the government money or be cost neutral. To compare net government costs, we first calculated the monthly payments on a 30-year, fixed-rate mortgage at a 3.5 percent annual interest rate on home values at about the 33rd percentile within several housing markets. We then added an additional $200 per month for taxes, insurance, and an escrow for maintenance.
Tabulations indicate that FMRs in 2021 are more than enough to pay the full homeownership costs in many cities. And 35 percent of the payment could go toward the mortgage principal, helping the family build wealth.
To capture the order of magnitude of potential effects, suppose one-third of Black households currently receiving rent vouchers (about 500,000 households) converted to homeownership vouchers. And suppose 40 percent of currently income-eligible Black renter households not receiving vouchers (about 500,000 households) obtained homeownership vouchers. These two policy actions would raise the Black ownership rate to 62 percent.
Homeownership isn’t the best option for everyone, but it could be particularly effective for families likely to stay in the same home and in communities with scarce affordable rental options. Increasing homeownership could give Black families more opportunities to build wealth, narrowing the racial wealth gap and improving opportunities for current and future generations. As momentum for HCV program expansion grows, this is an opportune time to explore expanding homeownership vouchers to make homeownership possible for more families.
Batia Katz also contributed to this post.