It used to be all about the house. If you were a young person seeking lifelong financial security, homeownership was, for most of the 20th century, your ticket to that future.
America’s homeownership subsidies are a terrible way to help young people build wealth
For many Americans, the housing bust in 2008 changed all that. The first Millennials, born around 1980, eagerly entered the housing market in their mid-20s, but then experienced the full force of that economic disaster. The combined impact of the national flood of foreclosures, the loss of trust in the housing market, and the tighter mortgage standards that included higher initial down payments, pushed the rate of homeownership for 25- to 29-year-olds to record lows.
This experience has contributed to lower levels of wealth for the entire generation. Between 2004 and 2013, median net worth for families headed by individuals under 35 dropped 41 percent. Of course, nearly every family suffered over this time period. But a shock this severe among younger households is particularly worrisome because it could stunt asset growth over their entire lives, creating ripple effects in the broader economy for years to come.
Our society’s wealth-building structures are still aimed at addressing the needs of Millennials’ parents and grandparents, rather than adapting to meet the changing pressures facing young people in the 21st Century. Wealth building can’t be all about the long term anymore.
Encouraging homeownership isn’t the only-or even the best-way to help this generation build wealth. If the housing crash taught us anything, it’s that creating a better wealth-building policy structure for all Americans, including young people, requires fixing our broken systems and encouraging greater savings and asset diversification. The federal government spends upwards of $70 billion each year supporting homeownership through the mortgage interest deduction (MID). Perversely, the MID disproportionately benefit high-income individuals who pay high marginal tax rates and buy expensive houses.
The same is true of most of the other incentives for savings and investment that are also delivered through the tax code. What's more, the kinds of assets the tax code smiles upon are more likely to be held by high-income households in the first place. Only 37 percent of households in the bottom income quintile own a home compared to about 90 percent for the top quintile. The highest quintile starts at about $100,000, and not by coincidence, 77 percent of the benefit from the mortgage interest deduction goes to homeowners with incomes above $100,000. Having lower incomes on average than members of older generations, Millennials are much less likely to be able to take advantage of this tax benefit.
This policy pattern-encourage the rich to save, and then give them more money for doing what they would do anyway-holds with other long-term assets such as retirement accounts. About 90 percent of those in the top quartile of earners own a retirement account, compared to only about a quarter of those in the lowest quartile. Again, similar to the MID, 80 percent of the benefit of the preferential tax treatment of retirement accounts goes to the top quintile. Only four out of ten Millennials even have a retirement account, and of those who are saving anything at all for retirement, half are only saving between 1 and 5 percent of their incomes.
Wealth-building supports like these, built around tax benefits for homeownership or retirement savings, are doing little to help the younger generation become more financially secure.
What’s the first step to narrowing the gap between experience and policy here? More than anything, all households-not just Millennials-need emergency savings that can provide a personal safety net so that one car repair doesn’t send an entire family sliding into poverty. Yet there are no policies in place to support this need.
We could start by reforming savings policies to provide support to all income levels and help them with their life-long savings needs, both in the short and the long term. Then we could modernize tax incentives to help renter families and those in multi-family housing, rather than primarily subsidizing people with big houses, and develop a system of child savings accounts to help the next generation get a jump start on wealth building.
Policies like these would not only better support the needs of the Millennial generation compared to the regressive and poorly targeted policies currently in place; their implementation would be an important step to ensuring a more prosperous future for Americans of all generations.
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