On the surface, Kamala Harris’s proposal to provide $25,000 in down-payment assistance to first-time homebuyers looks to be an incentive for upward mobility. Historically, homeownership has been the foundation for wealth creation for those of modest means.
On closer inspection, however, down-payment assistance sends the wrong message — not only because already high home prices are likely to rise as consumer demand is goosed by yet another subsidy, but also because of the social policy such a subsidy implies.
There are good reasons banks have historically asked for a down payment when lending for a home. First and foremost, doing so limits their financial exposure by limiting their total loan amount. But crucially, it also encourages the very habits and behaviors that limit the likelihood of later foreclosure and increase the odds of households sustaining upward mobility.
Down payments do, to be sure, loom as an obstacle for prospective homebuyers. But, at the same time, they encourage a key homeowner habit: old-fashioned thrift. Saving for a down payment requires households to save rather than purchasing other desired goods — just as, once they own a home, they will have to put aside rainy-day funds for repairs. What’s more, saving for a down payment is much easier for households with two members and/or two incomes, meaning the need to save encourages marriage. And the very process of saving and achieving the goal of ownership provides a sense of achievement that will make a household value its home more highly.
Those are the rewards of saving for a down payment. But not saving for a down payment also poses risks. Low-down-payment mortgage loans provided through the Federal Housing Administration have historically had higher default rates. To take one recent example, the overall mortgage-delinquency rate in the third quarter of 2023 was 3.62 percent; the FHA delinquency rate for the same period was 9.5 percent.
The risks extend beyond individuals and beyond lenders to whole lower-income neighborhoods. Homeowners are part of what can be understood as a virtuous circle; when they make their payments and maintain their properties, they rely on their neighbors to do the same. When those neighbors — subsidized by the government — have less skin in the game, their likelihood of foreclosure inevitably increases. And there is nothing worse for a neighborhood than vacant or dilapidated homes; property values overall suffer.
That is exactly what we saw in the 2008 financial crisis — when “low doc” and “no doc” loans, spurred by “affordable-housing mandates” imposed on mortgage buyers by Fannie Mae and Freddie Mac, led to concentrated delinquencies in neighborhoods that such mandates were ostensibly meant to improve. In New York City, for instance, New York University’s Furman Center for Real Estate and Urban Policy, in a report aptly titled “External Effects of Concentrated Mortgage Foreclosures,” found that “high-exposure neighborhoods tend to have a greater proportion of black and Hispanic residents, lower median incomes, lower median sales prices and higher rates of subprime lending than low-exposure neighborhoods.”
Put another way, easy credit often harms those it sets out to help — and down-payment assistance is just another form of easy credit.
To be sure, those of modest means — those without access to significant family wealth — will have a harder time saving for a down payment. The solution to that problem, however, is a greater supply of small, modestly priced homes. The Harris proposal does, to its credit, point in that direction, offering a tax credit for developers who build “starter homes.” But permitting such homes to be built at all is a function of local zoning laws. Less-restrictive zoning laws will have to be realized at the local level, where developers must persuade officials that it’s in a community’s interest for there to be more housing available for all who want it. This is the approach of the Yes In My Backyard (YIMBY) movement — and it’s a far more promising one than Harris’s progressive default of sending out more checks.
