This research brief presents three articles related to housing affordability and homeownership in the U.S. Conclusions and implications from researchers are presented that may assist practitioners working with clients who are looking to either rent or become homeowners.

“Weaknesses of Housing Affordability Indices Used by Practitioners” by M. D. Jewkes and L. M. Delgadillo (Journal of Financial Counseling and Planning, 2010)

This paper provides a review of three common affordability indices used by counseling practitioners, industry practitioners, and local policy decision makers. Researchers present strengths and weaknesses of each of these indices and provide some implications for practitioners working with clients.

The first index presented is the Department of Housing and Urban Development (HUD) Affordability Index for homeowners and renters. The HUD measure is the legislative standard used to qualify applicants for housing assistance. It is commonly used by housing counselors and educators to assess how much a first-time homebuyer client can afford. Strengths include: simple to compute, data is readily available, and a useful way to describe what households spend on housing at given points in time. Conversely,the HUD ratio fails to take into consideration a cost of living variable, does not control for quality of housing over time, and fails to consider other costs that affect housing costs (interest rates, home appreciation, and increases in household utilities).

The National Low Income Housing Coalition Housing Wage Measure (NLIHC) uses HUD Fair Market Rent to develop statistics to calculate the needed hourly wage (housing wage) to afford FMR in a given geographic area. Strengths of this measure include that it is geared specifically toward renters and that it highlights local discrepancies in wages and housing costs. In addition to the weaknesses presented for the HUD ratio, the housing wage does not include the expense of rental insurance.

The final index discussed was the National Association of Realtors (NAR) Measure. This is known as the housing affordability index or the standard ability-to-pay ratio. It is a measure of whether or not a typical family could qualify for a mortgage loan on a typical home (assumes a 20% down payment and that the monthly principal and interest does not exceed 25% of the median family monthly income). The biggest strength of the NAR measure is it can be used in any housing market (local or national). Weaknesses included that it does not take into account other housing costs, it loses its impact on a national level, it does not consider housing quality or location, and it uses national median family income which does not include single-person households.

The researchers suggest that practitioners/counselors use a revised residual income approach when working with clients. Instead of just determining what a household can qualify for, it is important to determine what they can afford in the future as well. The residual amount is the amount of income that an individual has after all personal debts have been paid making sure to discuss anticipated changes that might occur.

“Homeownership and the American Dream” by L. S. Goodman and C. Mayer (Journal of Economic Perspectives, 2018)

The authors of this paper put forth questions as to whether the American Dream should really include homeownership or instead focus more on other aspects of upward mobility. The article took a detailed look at U.S. homeownership from three different perspectives; comparing homeownership rates in the U.S. to other countries, demographics of homeowners, and financial benefits of homeownership. The paper presents information that, in the aftermath of the Great Recession, homeownership fell due to tight credit conditions, problematic student loan debt, stagnant wages, and possibly a change in attitudes toward homeownership.

The authors concluded that homeownership is valuable. On average, it allows families to build wealth and serves as a measure of financial security. Homeowners must be able to hold on to their homes during times of market volatility and long enough to overcome transaction costs (moving, down payment, etc.). It has become more difficult to become a homeowner since the Great Recession because of credit constraints and there is a shortage of entry-level inventory. However, homeownership should still be part of the American Dream without being pushed on clients as it is still not for everyone.

“Homeownership Among Millennials: The Deferred American Dream” by Y. Xu, C. Johnson, S. Bartholomae, B. O’Neill, and M. S. Gutter (Family and Consumer Sciences Research Journal, 2015)

This paper is a comprehensive literature review of research related to homeownership among millennials (those born between the early 1980s and 2000s). According to research, 75% of millennials still have a long-term goal of owning a home, 85% believe owning makes more sense than renting, and 30% question their ability to be a successful homeowner.

Themes emerged in the literature to show millennials have both external and internal factors that affect their ability to be homeowners. Credit accessibility is an important external factor for millennials’ homeownership. Life cycle factors such as financial resources, student loan liabilities, and family decisions such as marriage and parenthood are internal factors affecting home ownership.

Housing and financial educators should consider generational influences when working with clients. Key questions for practitioners to consider would be: (a) How has the view of homeownership changed?; (b) How does this unique labor force situation affect information and advice that is provided?; (c) How can they improve millennials’ financial efficacy?; and (d) How can they address millennials’ challenge of becoming a homeowner?

Carrie L. Johnson, AFC®, Ph.D. earned her B.S. in English for Information Systems from Dakota State University in Madison and her M.S. in Family and Consumer Sciences from South Dakota State University in Brookings. She earned her Ph.D. in Family and Consumer Science Education from Iowa State University in Ames

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