Joint Center for Housing Studies

Because home equity is low-income households’ dominant form of wealth, an understanding of the price dynamics of the housing stock held by these owners and the timing of their purchases and sales is important for understanding the risk-return tradeoffs associated with their decision to buy homes. Asset appreciation enjoyed or depreciation suffered by individual owners depends, however, not only on price movements in the lower range of the house price distribution or in low-income neighborhoods. It depends also and importantly on the market timing of low-income purchases and sales and on the willingness and ability of low-income homebuyers to weather declines in home prices and the broader economic downturns that often accompany them. The only way to evaluate the shares of low-income homebuyers that sell at an inflation-adjusted price greater or lesser than the price they paid is to analyze linked purchase and sales information for individual low-income owners. In this paper, we build upon and advance earlier efforts by using matched pairs of housing transactions in four MSAs for homes both purchased and sold between 1982 and 1999. We compare the returns (defined restrictively throughout as change in asset value net of transaction costs) earned by buyers of low-cost housing to those of other buyers. (Lowcosts homes are defined as homes affordable to those earning 80 percent or less of the area median income under assumptions about mortgage terms and costs in the year of purchase.) Contrary to the general public perception that low-cost homeowners are more likely to experience real losses when they resell, our findings suggest that losses are generally less common and less severe among those who purchased homes that would have been affordable to low-income households at the time of purchase. Nevertheless, for all groups, real losses are remarkably common. We also consider the market timing of sales decisions by looking at returns to low, middle, and high-cost homes in each area over different phases of the housing cycle. In almost all cases we find that low-cost owners are substantially more likely to sell at a profit during market upswings than owners of midand high-cost units. Owners of low-cost homes are also noticeably less likely to suffer losses when selling during market downturns. Finally, we examine how the home-price composition of purchases varies over different phases of the housing cycle in all four markets. During the 1980s and the early 1990s, low-cost homes comprised a larger share of purchases near the trough than during the peak, while high-cost owners accounted for a larger share of purchases near the peak and on the downslide. We present evidence that low-income buyers have been accounting for a growing proportion of all buyers at what now may be approaching peak prices in many areas, raising questions about the consequences of the recent surge in low-income homeownership on the distribution of returns.