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To Buy Or Not to Buy? Understanding Tenure Preferences and the Decision-Making Processes of Lower-Income Households

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To Buy Or Not to Buy? Understanding Tenure Preferences and the Decision-Making Processes of Lower-Income Households Joint Center for Housing Studies Harvard University To Buy or Not to Buy? Understanding Tenure Preferences and the Decision-Making Processes of Lower-Income Households Carolina Reid University of California, Berkeley October 2013 HBTL-14 Paper originally presented at Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families – A National Symposium held on April 1 and 2, 2013 at Harvard Business School in Boston, Massachusetts. © by Carolina Reid. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Any opinions expressed are those of the author and not those of the Joint Center for Housing Studies of Harvard University or of any of the persons or organizations providing support to the Joint Center for Housing Studies. I’m sitting on the lawn of a modest single-family home in Albuquerque, helping a toddler put together her Mega Bloks as I talk with her mother, a 24-year old Latina who has lived in the United States her entire life. We’re taking advantage of an unusually warm February day, and the interview is going better now that we’re at her home rather than sitting in the nearby public library. While earlier on in the conversation I felt as if she were giving me carefully considered answers to my questions about her home search process (“We did a budget to see what we could afford”), now she’s allowing more emotion to come through in her responses. She points to a row of rooftops just visible over her neighbor’s backyard – a recently built subdivision that is filled with two-story houses, their newness standing in stark contrast to the older houses in neighborhood in which we’re now sitting. “If we could only afford to live there,” she says. “That’s what I want for my daughter. A house that shows we’re providing for her in the right way. That we’ve made it. So she’s not a second class citizen.” She then goes on to explain how she’s willing to forgo her careful budget—in addition to increasing the number of hours she works to save a bit more—in order to buy one of those houses. This one interview encapsulates the challenges of understanding consumer decisions in the homeownership market. It’s never simply about an economic utility function. Certainly, buying a home is a financial decision, and every single person I interviewed recognized (and valued) the investment potential of owning a home. The recent housing boom and bust, coupled with the foreclosure crisis, was at the forefront of everyone’s mind, and most of the families were watching the real estate reports with keen interest. Were prices going up? Were interest rates going to stay low? Was this the right time to buy? But the interviews also revealed much more complicated motivations for buying a home, and highlighted the extent to which a whole host of other non-quantifiable factors– including optimism, identity, and culture—influence consumer decision-making processes. These non-quantifiable factors are not negligible and they have material effects, not only on the financial well-being and vulnerability of the households themselves, but also on which neighborhoods benefit from owner-occupied investment. In this paper, I report on the findings from four focus groups and twenty individual interviews designed to examine how households make decisions about buying a home. The focus groups and interviews were conducted in Oakland, California, and Albuquerque, New Mexico, between December 2012 and February 2013. All of the respondents—43 in total—were members of lower-income households (earning less than the median for their respective Metropolitan Statistical Areas), with children, of working age, and who were in the process of buying a house or had bought a home within the last six months. For all of them, this was their first home-buying experience, and all but three were going to be the first generation in their families to own property in the United States. As a result, the data provide rich insights into the processes that influence the homeownership decisions of lower-income, first time homebuyers. This paper summarizes the findings related to four key aspects of the decision-making process: a) what motivates the shift from renting to owning; b) what factors influence neighborhood choice; c) the heuristics borrowers use to make financial decisions about their housing choices; and d) the prevalence of “optimism bias” in household decisions about buying a home, and how that optimism stands in stark contrast to their vulnerability in the labor market. The paper proceeds as follows. I begin with a brief overview of the literatures that form the background for this study, including studies on tenure choice, residential location, consumer decision-making, and behavioral economics. I then provide background on the qualitative data as well as some brief statistics that highlight the different contexts of the Oakland and Albuquerque housing markets. In the third section, I present the findings from the qualitative data, focusing on the four key findings described above. In the final section, I discuss the potential implications of this study for public policy, and suggest directions for future research. 2 Literature Review Interestingly, despite the volumes of literature on homeownership, housing tenure choice, and consumer behavior, it was remarkably difficult to find studies that use in-depth qualitative methods to understand the decision-making processes of first-time homebuyers, and even more difficult to find studies that focus specifically on lower-income households. Instead, I found that I had to turn to many different literatures to stitch together a frame for thinking about what factors influence the decision- making process, and what heuristics or biases might be present in how households filter information and make choices. In this literature review, I briefly review the studies that most inform this research. First, I draw on the rich literature on tenure choice and residential mobility. Since the early 1980s, there has been increasingly sophisticated quantitative research into the factors that influence a household’s decision and ability to buy a house, including the relative cost of owning over renting (e.g. Haurin et al., 1997; Ioannides, 1987; Hendershott and White, 2000; Linneman, 1985); income, wealth, and credit constraints (e.g. Barakova et al., 2003; Brueckner 1986; Bourassa, 1996; Haurin et al., 1997; Painter et al., 2001), and household characteristics, including age and life course stage, education, and race (e.g. Clark and Dieleman 1996, Gyourko and Linneman, 1997; Ioannides, 1987; Long and Caudill, 1992; Painter et al., 2001; Wachter and Megbolugbe, 1992). Related to this research are studies that examine location choice in residential mobility and tenure decisions. While many of these studies focus on job accessibility (Van Ommeren et al., 1997; Waddell, 1993; Horner, 2004), more recent studies have explored the other factors that influence neighborhood preferences, including housing type and open space (Parkes et al., 2002) , personal income and house prices (Cameron and Muellbauer, 1998; So et al., 2001), racial differences (Gottlieb and Lentnek, 2001; Taylor and Ong, 1995; South and Crowder, 1998), and proximity to retail and service facilities (Waddell et al., 1993). Researchers working in these areas are have emphasized the importance of situating the transition to ownership within a life course perspective, recognizing that a family with young children may make different residential housing choices than either young adults without children or the elderly (Cummins and Jackson, 2001; Davis, 1993). Researchers are also increasingly studying how gender roles, intra-household dynamics and negotiations influence decisions about residential mobility, particularly among dual-earner families (Jarvis, 1999; Bruegel, 1996; Cooke, 2001; Bailey et al., 2004). These studies all point to the contextual nature of the housing tenure decision and the interdependence of decisions around residential mobility, location, and the welfare benefits of multiple people within the household. Nevertheless, the analysis tends to focus on quantifiable attributes that determine housing tenure outcomes, as opposed to revealing the processes and heuristics by which consumers make decisions about their housing choices. In addition, as Munro (1995) notes, they “typically preserve the central neo-classical assumption of a utility maximizing individual.” This suggests that there is a value in developing a greater understanding of the heuristics, biases, and other non-economic motives that might drive consumer choice in the housing market. What forms peoples’ views of what neighborhoods are initially acceptable or unacceptable? How might those preferences differ between different demographic or socio-economic groups, and how might they change over time? What rules of thumb do households use to determine how much to spend on a house, and are these mutable? To guide my inquiry in these areas, I reviewed the relevant literature on consumer decision-making and behavioral economics. While the literature on behavioral economics and applications to consumer finance is too vast to review here (see Mullainathan and Thaler, 2001; Thaler and Sunstein, 2008; Tufano 2009 for reviews), this body of work is helpful in that it challenges the notion of ‘unbounded’ rationality underlying most
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