GLOBAL ECONOMY

When Owning A Home Becomes A Hazard (And How To Protect Yourself)

Reaching for “the American Dream” has meant, for many, the opportunity and ability to own one’s own home. This holds true for many Latinos. According to a recent report from NAHREP (the National Association of Hispanic Real Estate Professionals), Hispanics “lead the surge in homeownership,” accounting for over half of the total net increase of owner households in the U.S. in 2012.

While it is fantastic that U.S. Latinos have the ability and desire to become homeowners, there are also several traps for the unwary, if one is not careful.  Home ownership is a great goal, so it’s important that an aspiring homeowner become educated about potential pitfalls – and how to avoid them.

The desire to own a home is often a profoundly driven by emotion – it stems from a sense of pride, community, and stability, among other emotions.  However, owning a home is also very much about wealth.

Homes are the largest investment that most American families make and by far the biggest item in their wealth portfolio.  This is especially true for Hispanic families.

When there is a large amount of one’s wealth in one place, then any damage to that asset is harmful to the whole of one’s wealth ‘portfolio’ – and even to the underlying stability of a household itself.  It’s therefore important to prevent against risk and protect against attack of that value.

We saw this happen when Hispanics were hit hard by the housing crisis.  

A recent Urban Institute Report found that between 2007 to 2010, Hispanic families lost 40 percent of their wealth (compared to 31 percent for black families, and 11 percent for white families). A Pew Report states that between 2005 and 2009 Hispanic wealth declined by 66 percent.

A huge factor for this drastic drop in wealth was that the housing downturn hit Hispanic households harder than it hit non-Hispanic white households.  The reason for this especially hard blow to Hispanic households was a combination of predatory lending practices, timing of purchases as compared to the burst of the housing bubble, geographic distribution of Hispanic households, and higher debt-to-asset ratios (and a lack of financial cushion) within Hispanic homes.

Hispanics were targeted by banks for less than optimal loan products – which left them at even greater risk during the housing crisis. These discriminatory lending practices meant that Hispanics had loans at higher interest rates, possibly adjustable, and for a larger percentage of total household income.

Additionally, many young Hispanic families bought homes as the housing bubble was inflating and reaching its peak.

Furthermore, Hispanics are concentrated in the parts of the country that were hardest hit by the housing bubble.

While owning a home has historically been the most successful vehicle for people to build wealth, it needs to be entered into with caution.  The foregoing circumstances created the ‘perfect storm’ and hurt Hispanic households dearly.  Many Hispanic homeowners found themselves ‘underwater’ (or with negative home equity) and some entered into foreclosure.

This is not to say that we should stop seeking to own homes.  Rather, be smart and take the preventative steps below to make sure that huge proportion of your wealth has a good foundation and remains safe.

Make Sure to Have a Savings Reserve

Homeowners may often believe that because their house payment takes up such a large portion of their income, they “can’t” save anything else.  Don’t make this mistake.

When a safety net (savings) is not present, then when emergencies hit, you can find yourself in free fall.  These emergencies may come about during loss of a job, for example, as happened to many families during the Recession.

Build Wealth in Assets Other Than Your Home

Housing wealth accounts for 28 percent for the average non-Hispanic white household, while within Hispanic households, the percentage tends to be much higher.

Equity in business is the second-biggest class of assets among non-Hispanic white households.  Spend some time thinking about growing other aspects of wealth, in addition to your home equity.

Know Your Loan Options

When purchasing a home, it pays to do some research and make sure you’re getting the best deal.  While there is lots of discussion regarding the more limited financing options now available (compared to several years ago), it still makes sense to shop around, and ensure you understand the terms you’re getting into regarding your home loan.

Keep Debt Proportion Down

Latinos carry more debt relative to their household assets than do non-Hispanic whites.

It is important that we keep the amount of our debt, in proportion both to income, and to assets, within a reasonable range.

This piece is not written to incite fear among potential homeowners. In fact, there have been multiple studies that show that Hispanics will and do play a powerful role in the economic recovery of the U.S. – in part through buying homes.

Nevertheless, it’s important for us to recognize the limitations of holding a large majority of our wealth in our homes, and learn to balance our risks and rewards with more education so we can build the skills to grow our wealth.

Aurelia Flores is Senior Counsel at a Fortune 500 company and former Fulbright Fellow who graduated from Stanford Law School. Her website, PowerfulLatinas.com, offers stories of success, along with resources and programs focused on Latino empowerment.

 

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