The Policy Implications of Portfolio Choice in Underserved Mortgage Markets

Abstract:     
Home ownership increases the incentive to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. However, these benefits are not costless to homeowners. With a mortgage comes the possibility of default, the financial demands of maintenance, a reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth.

Recently, policy makers have sought to increase mortgage lending in traditionally underserved markets. In this paper we consider the effects of this policy in light of the risk and return of housing and the current tax treatment of the home mortgage deduction. We find housing to be a relatively poor asset class in which to invest the bulk of family wealth. Trends in housing suggest that a large percentage of homeowners who bought and sold within a five year horizon in the United States over the last twenty years lost money on the investment. Lowering the equity required to purchase a home does little to alleviate the problem. We show that the current tax code - if anything - encourages renting over buying and gentrification of low income housing markets.

If the government wishes to encourage home ownership among low income families despite the risks, then we argue that government agencies should share information about the risk and return of home ownership with its citizens. In addition, a direct subsidy through a tax credit may be both warranted and necessary to achieve the desired result.

JEL Classifications: R21

Working Paper Series