Guest Post: Why Social Loans Matter for Equitable Homeownership
This guest post is written by HousePlant Research Associate Annie Rafferty (Oberlin class of ‘23)
Homeownership has long been a hallmark of success, with nearly three-quarters of American adults viewing it as a sign of achieving the American Dream, and for good reason. Not only is it a place to build your life but also a secure investment that you can use to build a stable financial future. Homeownership facilitates wealth accumulation because homeowners monthly housing payments, the biggest expense for many households, go towards accumulating home equity that they can borrow against or cash out on when they need to or sell the home. Home equity is the largest single financial asset of middle income households, accounting for at least half of their collective net wealth, making it crucial to middle class earners wealth development. Homeownership also carries the advantage, which has shown to be particularly important in recent years, of insulating homeowners from rapidly rising housing costs. Most homeowners are on fixed rate mortgages so their monthly payments are relatively stable and when housing prices do go up they actually benefit because the value of their asset, their home, increases. This makes homeownership an extremely valuable or even necessary investment for anyone looking to establish financial security.
However, while they benefit existing homeowners, rising housing prices and rent, especially in major metro areas, are putting homeownership and the financial security it can provide just out of reach for many, especially young or disenfranchised, Americans. It used to be that renting was a more affordable and flexible alternative to homeownership that let people put more money into their savings so that when they were ready they would be able to buy a home if they wanted it.
As rents rise and outpace income gains, many Americans are being forced to spend such a large portion of their income on rent that they can barely afford to save for a rainy day much less a down payment. In 2020, the Census Bureau found that nearly half (46%) of American renters spent more than 30% of their income on rent which classified them as “cost burdened” by the Department of Housing and Urban Development. Furthermore, just under a quarter of renters, totaling 9.9 million households, spent more than 50% of their income on rent. The average cost of a rental unit relative to the average income of a millennial in their 30s is almost twice as much as it was for boomers at the same age. This cuts into their ability to save for a downpayment.
The cost of buying a home relative to income is also increasing, meaning that people need to save a larger portion of their income to cover a down payment. In short, renters are caught in a double bind as higher rents make it harder to save while higher housing prices mean they need to save more to be able to cover a down payment.
Unsurprisingly, rates of millennial homeownership are significantly lower than previous generations were at the same age. At age 30, only 42% percent of millennials own a home, whereas 48% of Gen X and 51% of Boomers owned a home at the same age. The rate is even worse among Black and Latin American Millennials. While more than half of White Millennials own their home (53%) barely a third of Latino Millennials (35%) and a fifth of Black (21%) Millennials. The gap in the rate of homeownership is actually larger between White and Black Millennials than among Americans adults at large. White Millennials are more than 2.5x as likely to own a home than Black Millennials whereas White Americans adults are only 1.7x as likely as Black American Adults. This indicates that homeownership becoming less accessible is disproportionately affecting those who are historically economically disenfranchised and is helping perpetuate racial inequality.
It is not that millennials are happy renting and are not interested in owning a home, it is simply not feasible. A survey from Apartment List of Millennial renters found that 89% of them would like to own a home. When asked why they had not purchased a home yet more than 70% cited affordability and more than 60% specifically cited not being able to afford a down payment. Comparatively less than 30% were worried about being unable to meet their monthly mortgage payments.
Particularly as housing prices rise, affording a downpayment is emerging as a primary barrier to many prospective first-time home buyers. Among Millennial renters interested in buying a home, almost half (48%) have no down payment savings and only 11% have more than $10,000 saved. Higher down payments lead many buyers to depend on assistance from family and friends and shuts many of those without financial assistance out of the housing market. A survey from Lending Tree found that nearly three quarters (73%) of recent first time home buyers received assistance with their down payment from family, friends, their employer, or an assistance program. This puts people who cannot afford a down payment and do not have access to support at a disadvantage by forcing them into a cycle of renting where if they do ever manage to save up enough money to cover a down payment they’ll still be behind in their savings compared to peers who were able to afford a home when they were younger because they had support. In effect, high down payments are limiting social mobility through homeownership by turning it into a guarantee for those who grew up with support and near inaccessible for those who did not.
Houseplant aims to make down payments more accessible by helping homebuyers crowd source loans and gifts to allow them to afford their downpayment. Prospective homebuyers can create an Ask page where they outline their story and goals that they can share among family and friends and online just like any other crowdfunding campaign. Individuals can use ask pages to offer borrowers social loans and gifts and if the borrower accepts, Houseplant will create a PDF record to formalize the deal. This essentially streamlines a process that many homebuyers already rely on. By using Houseplant, prospective homebuyers are able to reach out to more people to ask for down payment assistance, which makes it more accessible for people who may not have one person they can completely rely on financially but do know a lot of people who might be able to pitch in a little. Additionally, lenders can feel more confident making an offer because of how Houseplant formalizes the process which may make them more willing to lend more money.
Houseplant will enable people to reach their dream of owning a home far earlier than if they had been forced to wait until they were able to save enough on their own. It will allow them to exit the cycle of renting and start focusing on building a secure financial future.
Social loans also allows homebuyers to put more money down which can save them a lot of money in the long term. While it is possible for homebuyers to get an FHA loan with as little as 3.5%, putting more money down can often get homebuyers a lower interest rate which saves them a lot of money on servicing the loan. Houseplant has a calculator to help homebuyers see just how much they could save by putting more money down.
The social loan structure that Houseplant relies on is also more equitable than traditional lending and more transparent and reliable than informal personal loans. When seeking a loan from a traditional lender the most important factor will be a borrower’s credit score which they use to decide whether or not to give you a loan and determine your interest rate. So a low score can lead to paying far more to service the loan. This can unfairly penalize people without a credit history or those who had been stuck in a bad situation that forced them to fall behind on bills. Credit scores are supposed to represent a borrower’s reliability and the likelihood of default, but they often really just end up rewarding people who have financial support. Houseplant and social loans allow borrowers to be more than just their credit score by letting them post their story and be judged based on that, not their credit score. Houseplant also helps borrowers and lenders formalize these loans and avoid many of the pitfalls of personal lending like unclear terms and a lack of documentation. This helps reduce risks for lenders so they can have peace of mind when they make their offer.