Rising minimum wages will allow many working-class Americans to buy a first home.
A housing boom doesn’t have to be followed by a painful bust. The boom of the last decade was powered by speculative froth and lax mortgage underwriting – and it ended predictably badly. The present day, with large employers continuing to raise their minimum wages, creates a framework for a new, more sustainable housing expansion.
Much has been written about the reasons the last housing boom collapsed, but a simple way of thinking about it is too many homeowners had mortgages they couldn’t repay, either because they had taken on too much debt, the interest rates on the mortgages reset at a bad time, or they suffered job losses when the economy turned down. And then a wave of foreclosures led to forced selling, downward pressures on home prices, and all kinds of negative second-order effects in the economy and financial system.
The foundation for a new kind of increase in homeownership has been building for years in the labor market. Labor activists have been fighting for minimum wage increases for years, whether they be mandated by law in cities and states or adopted by large employers in response to public pressure and a tight labor market.
At first the policy successes were $15-an-hour minimum wage laws in high-cost, progressive cities like Seattle. What’s been changing is large employers increasing their minimum wages, with stated goals to raise them to $15 per hour or higher in some cases.
Costco raised its minimum wage to $15 an hour last month. Target just raised its minimum wage to $13 an hour, with a goal of getting it to $15 by next year. Many large banks raised their minimum wage to $15 in response to the Tax Cuts and Jobs Act, but Bank of America is taking it a step further, going to $17 next month and $20 an hour by 2021.
In high-cost cities, $15 or $20 an hour might still not go very far given the cost of living, but when those minimum wages apply across the country, they create financial options for employees in lower-cost communities. Consider a two-income household in 2021 in which one person is a Bank of America employee making $20 an hour, and the other a Target employee making $15 an hour. If both people work full-time, that’s a household with a $70,000-a-year income. A household in that income bracket can service the mortgage on a house in the $250,000 to $300,000 range with a loan from the Federal Housing Administration with a 3.5 percent down payment. In lower-cost communities, that’s a lot of house.
In addition to giving “involuntary renters” a chance at homeownership, this also creates some intriguing possibilities for metro areas with older neighborhoods in need of investment and revitalization. A problem in some older working-class neighborhoods is that as their homeowners age, houses are not well-maintained and start to wear out. When those homeowners eventually vacate the houses, they’re in disrepair. Some are abandoned or turned into cheap rental units, and the neighborhood enters a downward spiral as buyers with means look for newer, more attractive neighborhoods. Falling property values take a toll on tax revenue for local governments.
But with these higher minimum wages coming from large employers, we’re creating a new class of workers with the financial ability to service mortgages on modestly priced homes. And these types of aging communities are a great opportunity for cities to find new demand for neighborhoods in need of new residents and investment using a mix of tax breaks and down payment assistance to entice buyers. Refurbishing cheap older homes would create jobs and economic activity for cities while increasing the homes’ value and putting them back on the tax rolls of governments. For working-class households that lack college degrees, it’s an opportunity to transition from renting to homeownership.
Not only would a housing expansion like this be more sustainable, backed by workers with real incomes and better mortgage underwriting, but it would also provide a public benefit by revitalizing communities that could really use the help.
Source – Bloomberg