Plenary Session Highlights with:
Ray Boshara, Federal Reserve Bank of St. Louis
Jared Bernstein, Center on Budget and Policy Priorities
William Emmons, Federal Reserve Bank of St. Louis
Kim Manturuk, University of North Carolina Center for Community Capital
Nathalie Gons, Office of Financial Empowerment, New York City Department of Consumer Affairs
Jared Bernstein: This session is billed as resiliency and rebuilding and looking about people and the impacts of all the topics you just heard about. But to me reading the three papers and hearing them presented, the word that comes to mind is balance. I think many of us on the panel and in the audience, certainly the mission of the folks in this community, are thinking a lot these days about the balance of homeownership, which we value for lots of reasons that you heard—not least health, which we don't hear enough about (I thought Kim's [Manturuk] paper was interesting in that regard)—but balancing homeownership with the risks engendered when risk, in particular, is systematically underpriced.
And I thought Bill's [Emmons] paper, in particular, suggested some of the downsides to younger folks, but, really, just look around. We are still struggling; climbing our way out of the worst recession since the Great Depression (and [St. Louis Fed] President Bullard was speaking to some of these issues in his introduction) in no small part, in fact, largely due to a bursting housing bubble that was generated by a set of practices, including some very bad underwriting and some financial "innovations" gone bad. So I think, and I've—in a history of talking about asset building with Ray [Boshara] and others in the field—I've worried about this issue of wanting people to be banked and to be owning assets and to be moving from renting to homeowning if they can do that; balancing that with risks that I think really blew up in everybody's face in a very unfortunate way.
William Emmons: As a group, young families were unusually highly concentrated in housing, and let me emphasize, not just highly concentrated—that's always been true—but what we've documented, that they were unusually highly concentrated in housing with high balance sheet leverage just before the crisis. Large house price declines, therefore, hit young families' balance sheets especially hard. Really, it was a double whammy, both sides of the balance sheet: large declines in the value of those young families' largest asset, and that was, in fact, multiplied by the effect of leverage because young families typically have relatively high debt to finance the house.
And as we dug a little bit deeper, it became clear to us that the large negative wealth effect of homeownership was common across young families of all races, ethnicities, and education levels. Although there were differences, the predominant effect, and I want to try to convince you of that, really was just the point in the life cycle.
Principles that I think this research at least suggests are that asset diversification beyond housing probably is beneficial, high leverage can be dangerous, and potentially, I think, putting these things together given the damage that we've seen to young families' balance sheets, I think that failure to maintain asset diversification and taking on high leverage, if that's necessary to become a homeowner, maybe the family's not ready to become a homeowner.
Kim Manturuk: One of the justifications that's been given for promoting homeownership is that there's a long tradition of research that finds an association between homeownership and health, particularly for lower-income families. However, we also know that the reality of homeownership has changed. It's entirely possible that in addition to the wealth-building benefits of homeownership no longer being as reliable, we may find that some of the social benefits of homeownership are also less reliable.
So when we talk about connections between homeownership and health, we're not just talking about the physical dwelling. There are a number of different factors which link homeownership and health. Housing is linked to health through the physical, social, and economic environment of the actual physical dwelling. People are healthier when they live in houses that are clean, safe, financially stable, and emotionally secure. But where people live, not only in the house, but in the neighborhood, also impacts their health. Where people live affects access to health services, public recreation spaces, and also environmental factors such as air quality and residential density. We find that the well-documented association between homeownership and health does remain in place following the crisis; however, the extra hit that homeowners take when they experience financial problems is certainly worrisome.
Further research should consider whether programs aimed at helping struggling homeowners can have health benefits in addition to financial benefits for those families. Second, this research highlights the need to develop policies to improve the rental experience. One option could be to incentivize landlords, possibly through tax incentives, to maintain high-quality rental housing so that renters can have the same healthy homes that homeowners have.
Nathalie Gons: Our belief and our experience is that financial stability, or rather financial instability, is a significant barrier to employment, to housing, and other objectives of poverty alleviation.
The pathway to financial security can be very different. For example, an employed and recently evicted client compared to a chronically homeless and unemployed client. So our counselors work very closely with our clients to jointly chart out the most effective pathway toward financial stability, which can include negotiating with creditors, creating a budget and savings plan, to name a few.
In order to deliver financial empowerment services at scale and in a customized way, we have to meet people where they are physically and psychologically—at key transition points in their lives. For example, back to work, newly employed, a time when someone is newly earning income, there is a sense of new beginning, and one can imagine a mental frame where one is more likely then to engage with a financial institution or a financial counselor.
Ray Boshara: The field is no longer just about savings and assets, it's about the entire balance sheet. If you don't tackle debt and look at the entire balance sheet, you're missing the picture. So that's the new framework. I think diversifying assets is key; it's not just homeownership. We think a lot about how you diversify an asset base. Third, there's a greater focus on emergency and short-term savings as opposed to long-term savings that are tied up, which have been found to achieve both stability and mobility for families, flexibility. And finally, I'd say we're thinking a lot about this question of "When do you pull a risk and when do you individualize it?" And I think the field is now taking more seriously this idea of, "How do you manage downside risk?"