Tags: clinton | bush | homeownership | election | campaign

Clinton, Bush Wealth-Gap Focus Misses Americans' Biggest Asset

Thursday, 30 April 2015 09:08 AM

Clancy DeSmet has given up hope of owning a home after he was denied a mortgage because of his student debt. His chance of building significant wealth is fading too.

“Every generation of parents thinks their kids are going to have as good a life, or better, than they had,” said DeSmet, 40, district coordinator for Vermont’s Natural Resources Board. “That’s not happening for a big chunk of my generation.”

The inability of Americans like DeSmet to buy a home is helping create the widest wealth chasm in three decades. Homeownership has declined to the lowest level since 1993, leaving millions of people without an asset that’s been the main source of wealth accumulation for the middle-class, research by New York University economist Edward Wolff shows.

Economic inequality, traditionally a focus of Democrats, has grabbed the attention of Republicans too. Jeb Bush, the former Republican governor who is expected to run for president, and Democratic contender Hillary Clinton have made the rich-poor divide a campaign issue.

“The decline in homeownership has profound implications,” said Wolff, who is also a researcher at the National Bureau of Economic Research. “It is one of the key reasons why wealth inequality has shot up over the last half dozen years. Homes are the leading asset of the middle class. They stopped buying homes, and their wealth is going to correspondingly decline as we have seen.”

Declining Homeownership

The share of Americans who own homes rose from the mid-1990s through the Internet bubble and peaked at 69.2 percent in 2004. It has steadily fallen ever since to 63.7 percent in the first quarter, the Census Bureau said Tuesday. In the aftermath of the housing crash, tougher lending standards, stagnant wages and rising home prices have posed obstacles to homebuyers.

Homeownership is the single most important buffer against rising inequality, said Wolff, who reviewed household wealth trends over more than five decades in a December NBER study, “What Happened Over the Great Recession?” Housing generated 63 percent of wealth in 2013 for middle-class families, defined as the middle three fifths, the research shows. That compares with just 8.7 percent for the top 1 percent and 28 percent for the next 19 percent.

The wealthiest Americans -- the top 1 percent, 10 percent and 20 percent -- made gains mostly through higher stock prices, Wolff found. The Standard & Poor’s 500 Index has more than tripled since March 2009, helping to boost household net worth to a record $82.9 trillion in the fourth quarter.

Widening Gap

“While the middle class are doing worse, the rich are mainly relying on stocks, which have done well,” Wolff said. “That widens the wealth gap between the middle class and the rich.”

The economic divide is at its widest since 1983 when the Federal Reserve began keeping the data, according to a Pew Research Center analysis. In 2013, upper-income families had median wealth of $639,400, or almost seven times the median of median-income families, at $96,500.

As the 2016 presidential race begins, politicians are pointing out the dangers of inequality, but haven’t detailed remedies yet. Clinton e-mailed supporters in April that it’s not enough that families fought their way back from tough economic times “when the average CEO makes about 300 times what the average worker makes.”  

Toxic Topic

Bush stressed the lack of upward mobility in a speech in March. “We’re moving to a world that is sticky in the ends, where it’s harder for people in poverty to move up and where the rich are doing really well and the middle is getting squeezed,” he said.

Since the subprime mortgage crisis thrust the economy into a recession, both Democrats and Republicans have avoided homeownership as a politically toxic topic. But as the housing market recovers, the Obama administration has begun taking small steps to promote homebuying, such as cutting insurance premiums for mortgage insurance for lower-income Americans.

Vice President Joe Biden has been outspoken on the benefits of owning property.

“So much of the long-term wealth and access to opportunity that has occurred in the middle class for the last seventy years has been a result of families who own their home,” Biden told an audience in April in Washington.

The financial crisis, which caused about 5.2 million people to lose their homes through completed foreclosures since December 2007, shows the harm that ownership can inflict. Foreclosures typically damage credit reports for about seven years. And 10.8 percent of all mortgaged properties had negative equity, with loans that exceed home values, in the fourth quarter.

Future Generations

The 30-year mortgage hasn’t worked well for lower-income families because it takes too long for them to build equity, said Edward Pinto, a resident fellow at the American Enterprise Institute. And homes in the bottom third of the market have appreciated below the rate of inflation in many cities, including Atlanta and Cleveland, since 1996.

“House-price appreciation isn’t reliable,” said Pinto, who’s promoting a 15-year mortgage to allow owners to build wealth more quickly. “You combine that with a 30-year loan and you’ve got the cards stacked against you.”

Research shows that the influence of possessing property stretches into future generations, helping determine everything from graduation to pregnancy rates. A New York Federal Reserve study in 2003 found that homeownership in an impoverished neighborhood may increase high-school graduation by about 10 percentage points.

College Enrollment

University of Southern California professor Richard Green found that kids of homeowners are less likely to get pregnant at a young age, have better cognition and fewer behavioral problems, according to his 2013 paper published by the U.S. Department of Housing and Urban Development.

A December 2014 study by Federal Reserve Bank of Boston examined the influence of rising home prices on children of owners compared with renters. As values increase, owners have more resources, which leads to higher college enrollment rates for their 19 year-old children.

A 1-percentage-point gain in prices when children of homeowners are 17 years old results in roughly a 0.9 percent higher annual income for them. That compares with an income drop of 1.5 percent for the kids of renters.

While homeowners gain wealth, renters are losing it. Families that owned homes had median assets of $298,900 in 2013, 8.4 percent higher than 1998, according to Federal Reserve surveys. Renters had median assets of just $13,400, a decline of 20 percent from 1998.

Student Debt

The gulf will continue to widen as more families do without the asset that provides the surest means to build wealth, said Tom Shapiro, director of the Institute on Assets and Social Policy at Brandeis University in Waltham, Massachusetts.

“Inequality is going to get worse,” said Shapiro. “As access to homeownership goes down, families in the middle have less structured opportunity for savings and for home equity,” he said.

DeSmet, who rents a farmhouse 10 miles from Montpelier, the Vermont capital, said he has too much student debt to get a mortgage. With $180,000 in loans from law school, his monthly payments of $1,200 are almost half his after-tax income.

DeSmet gets a reduction on rent for cutting the grass and pruning old apple trees on the 20-acre lot. He has a vegetable garden behind the house where he grows beans, peas, peppers, onions and tomatoes. He wishes he was tending his own land.

“I would have an energy-efficient, small house with a garden,” he said. “It’s one of those things I try not to think about.”


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Clancy DeSmet has given up hope of owning a home after he was denied a mortgage because of his student debt. His chance of building significant wealth is fading too."Every generation of parents thinks their kids are going to have as good a life, or better, than they had,"...
clinton, bush, homeownership, election, campaign
Thursday, 30 April 2015 09:08 AM
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