One of the Obama Administration’s proposed fixes for the housing crisis is to up the amount required for a down payment to purchase a home, perhaps even as high as 20 percent of the overall home cost. The logic behind the proposal is that the high down payment requirement will ensure that potential home buyers are truly able to afford their homes, thereby lowering the risk of default. While this looks like a good solution on the surface, in reality this requirement would erect new barriers to wealth accumulation while doing nothing to address some of the bad practices that led to the housing crisis.
As the graph below shows, it takes over 30 years for the average African-American household and nearly 25 years for the average Latino household to save the amount required for just 10 percent down payment loan. We can assume that it would take twice as long to save the amount required for a 20 percent down payment. Households of color are also less likely to have inherited wealth to be able to use for down payments and this difference is where the cycle of inequality begins. Once you have wealth, it is much easier to accumulate wealth that can then be transferred inter-generationally. If you can afford to buy a house, your household wealth begins to increase, which can be leveraged for further wealth accumulation. Structural practices reinforce this cycle through things like being able to secure lower interest mortgage rates with larger up-front payments.
Home ownership among young people is also falling and requiring higher down payments will likely cause ownership rates to continue to decline. Young people are already struggling to achieve economic security and without access to home ownership, will likely continue to fall behind their parent’s generation.
Preventing another foreclosure crisis is certainly important, especially as our economic recovery remains fragile. However, requiring prohibitively high down payments is not the best way forward. Stopping predatory mortgages, shifting focus to modifying mortgages instead of foreclosure, and pre-purchasing counseling are better ways to strengthen the housing market and encourage wealth building in low-income communities and communities of color.