Homeownership is Affordable Housing in New Mexico

 KELLY O’DONNELL, PH.D. | CHIEF RESEARCH AND POLICY OFFICER, HOMEWISE 

Executive Summary

New Mexico, like much of the nation has a severe shortage of affordable housing. Over 37 million U.S. households and over 200,000 New Mexico households pay more than 30 percent of their income toward housing. Federal regulators deem these households ‘cost burdened’ because spending such a large percentage of income on housing often necessitates difficult tradeoffs like spending less on food, healthcare and transportation.

Subsidized rental housing, including public housing projects and Section 8 rental vouchers, have long been the central feature of the U.S. housing safety net. Subsidized rentals are critical to ensuring that all Americans are housed, but rentals alone cannot solve the affordable housing crisis.

In contrast to renting, homeownership provides sustainably affordable housing because the principal and interest portion of the payment on a fixed-rate mortgage is constant over the life of a loan. Homeowners enjoy more consistent, and frequently lower, housing costs than renters and their monthly payments increase much more slowly over time because they are less impacted by inflation. Freed from anxiety about rent increases or eviction, homeowners are better positioned than similarly-situated renters to budget, plan, save, and ultimately, to get ahead.

One reason homeownership is under-utilized by government as an affordable housing strategy is the widespread belief that homeownership is more costly than renting. This report challenges that myth using readily-available U.S. Census data for New Mexico and demonstrates that for many moderate-and low-income households, homeownership is actually more affordable than renting.

The affordability of housing is measured by a household’s ‘housing expense ratio’ – the absolute cost of housing divided by total household income. New Mexico homeowners are generally better able than renters to afford their housing. The typical New Mexico homeowner spends 15 percent of their income on housing while the typical renter must devote 25 percent of their income to rent.

Some of the difference in the housing expense ratios of owners and renters is attributable to income –typical homeowners have higher incomes than typical renters. However, homeownership remains more affordable, on average, than renting even among low-income households. Renter households with annual incomes below $50,000, spend one-third of their income on housing while owners in the same income group spend less than one-quarter (23%).

The affordability advantage of homeownership is also evident at the local level. Renters in Albuquerque, Santa Fe, and Las Cruces, as well as those outside the metropolitan areas, have higher housing expense ratios than owners in the same areas, although in higher-cost markets like Santa Fe, the cost differential between owners and renters is considerably less than it is in lower-cost parts of the state.

Both in New Mexico and nationally, African American and Hispanic homeowners have higher average housing expense ratios than White non-Hispanic homeowners, but owners fare better than renters, regardless of race. In New Mexico, African American, Native American, Hispanic, and White non-Hispanic owners all have lower housing expense ratios than renters of the same race/ethnicity. Homeowners of color also experience lower average housing cost burdens than White renters.

Homeownership is particularly advantageous when inflation, which hit a 40-year high in February 2022, (1) is on the rise. Unlike renters who are perpetually vulnerable to housing cost increases, homeowners are less affected by rising home prices because the largest component of their mortgage payment – principal and interest – is fixed for the term of the loan. Even when residential property values are sky-rocketing, homeowners with a fixed-rate mortgage only see their monthly payments increase when their property taxes or homeowner’s insurance premiums go up. Meanwhile, the renter’s entire payment is subject to inflation, at a rate that often exceeds that of wage growth.

New Mexico policymakers are starting to recognize the true extent of the state’s housing crisis. The large appropriations made to the New Mexico Housing Trust Fund during the 2022 state legislative session indicate that the State is ready to take action to increase the supply of affordable housing. While homeownership is not the right solution for every household, it is an opportunity to obtain sustainably affordable housing that could benefit far more New Mexico households than it currently does. If New Mexico’s effort to improve housing affordability is to facilitate lasting financial security for working families, homeownership must play a central role.

Note to the Reader: Homeownership offers a variety of important benefits to moderate-income households. This report focuses on the short-term cost advantages of homeownership as compared to renting. Future Homewisdom reports will elucidate additional aspects of homeownership, including its cost effectiveness as a public sector affordable housing strategy, home equity as a tool of wealth-building, and the potential of homeownership to reduce racial wealth disparities, both in New Mexico and nationwide.

Introduction

New Mexico, like much of the nation, is in the midst of a housing crisis. An inadequate supply of affordable housing impedes upward mobility, limits the pool of skilled labor available to employers, forces families to live in crowded and substandard conditions, and imposes onerous, costly commutes on workers who can’t afford to live near their jobs. Although this issue has received a great deal of attention in recent months, the problem is not a new one. For decades, moderate-income households and working families have struggled with stagnate wages, rapidly escalating rents, and soaring home prices. In fact, over 37 million U.S. households and over 200,000 New Mexico households pay more than 30 percent of their income toward housing and over a third of these cost-burdened households must devote over half of every dollar they make to housing. Federal regulators deem households in the first category ‘cost burdened’ and those in the second category ‘severely cost burdened’ because spending such a large percentage of income on housing necessitates tradeoffs like spending less on food, healthcare and transportation. High housing costs are also a risk factor for homelessness because households that dedicate most of their income to housing are very unlikely to have savings or other assets that can help them weather a temporary set-back, like illness or the loss of a job.

Wide recognition of the pressing need to increase the supply of affordable housing has spawned a plethora of policy proposals at both the state and federal levels. Unfortunately, most of these strategies, like the housing crisis itself, aren’t new. Rather, they ‘double down’ on decades-old public sector investments in multi-family rental housing by building more public housing projects, increasing subsidies to private sector builders of apartment complexes that include some affordable units, and/or increasing access to ‘Section 8’ rent vouchers. While rental housing has an important role to play in addressing the housing crisis, focusing so intensely on the rental market fails to take advantage of America’s largest, most sustainable and enduring source of affordable housing: homeownership.

Why would well-intentioned policymakers seeking cost-effective solutions to a national crisis fail to recognize the ‘bird’s nest on the ground’ of homeownership? Two pervasive myths are largely to blame. The first widely-held misconception is that homeownership is more costly than renting. The second, perhaps more insidious, fallacy is that homeownership is ‘not appropriate’ for households below a certain income threshold. This brief debunks the first myth with readily-available, publicly-sourced data; but acknowledges that to achieve a lasting solution to the housing crisis confronting New Mexico and the nation, we must also address the pernicious role that false narratives about the willingness and ability of moderate-income households to manage their own finances have played in shaping U.S. housing policy.

Subsidized Rentals are a Costly, Partial Solution

Subsidized rental housing, in one form or another, has long been the central feature of the U.S. housing safety net, and rental housing does have an important role to play in ensuring that all Americans are housed. However, rental strategies fall short when it comes to ensuring long-term housing affordability, and over-reliance on subsidized rentals to meet the nation’s affordable housing needs is extremely inefficient public policy. Furthermore, 72 percent of US renters surveyed by the Pew Foundation said they wanted to own a home at some point. (2)

Many rental programs, such as rent vouchers, require a government assistance check to be issued every month to a landlord who is under no obligation to renew a tenant’s lease. In addition, on-going federal support for subsidies of any sort is not guaranteed. Changes in Congress or a new administration can mean cutbacks that reduce or even eliminate a family’s rent subsidy. Rent subsidies are also expensive for taxpayers. In federal fiscal year 2021 alone, the U.S. Department of Housing and Urban Development paid more than $39 billion in rent subsidies to landlords.

Homeownership, in contrast, provides the consistently affordable housing that modest-income households need. Unlike rents that increase with (and often out-pace) inflation, fixed-rate mortgage payments fluctuate very little and tend to become more affordable over time. Homeowners, unlike renters, are also protected from rent increases and eviction.

Owning is Often More Affordable than Renting

Contrary to popular belief, owning one’s own home is frequently more affordable than renting. The affordability of housing is measured by the ‘housing expense ratio’ – housing costs expressed as a percentage of a household’s overall budget. For example, a household with a monthly income of $2,000 that spends $1,000 on housing will have a housing expense ratio of 50 percent.

The typical New Mexico homeowner spends about 15 percent of income on housing while the typical New Mexico renter spends 25 percent (Figure 1). Some of the difference in housing expense ratio is attributable to income – typical homeowners have higher incomes than typical renters. However, homeownership remains more affordable, on average, than renting even after controlling for income. Renter households with annual incomes below $50,000, spend one-third of their income on housing while owners in the same income group spend less than a quarter (23%). Among New Mexico households with annual incomes under $20,000, homeowners spend an average of 32 percent of income on housing while renters in this income bracket devote almost half (47%) of their income to housing-related expenses (Figure 1).

Figure 2 compares the relationship between tenure and housing expense ratio for two types of households: those headed by someone 65 or older (senior households) and those headed by someone younger (working age households). (3) Owners have lower housing expense ratios than renters across the board, and when senior households are compared to working age households without controlling for income, median housing expense ratios are very similar. However, among low-income households, seniors have considerably lower housing expense ratios than their working-age counterparts. This contrast is particularly striking for households with annual incomes under $20,000.

The advantage of homeownership over renting is also evident at the local level. Figure 3 contrasts owner and renter housing expense ratio for New Mexico’s three largest cities and the state’s non-metropolitan areas. Owners have lower housing expense ratios across all locations and income groupings.

Figure 3: Median Housing Expense Ratios by Income and Location

Homeownership is more affordable than renting in all four areas, both for modest-income households and for households overall. Low-income households have the greatest renter/owner cost burden differentials in all four areas.

Figure 6 shows average cost burdens for low-income renters and owners in New Mexico’s three largest metropolitan areas as well as non-metro areas of the state. Among the groups depicted in Figure 5, nonmetro homeowners are the population least likely to be cost burdened, whereas renters in Albuquerque are more likely than any other group to experience both housing cost burden and severe housing cost burden.

Homeownership Benefits Households of all Races

The cost advantage of owning versus renting is also consistent across races and ethnicities. Figure 7 depicts the share of household income devoted to housing-related expenses for New Mexico households of different races and ethnicities. Both in New Mexico and nationally, African American and Hispanic homeowners have higher average housing expense ratios than White non-Hispanic homeowners, but the owners fare better than renters, regardless of race. Homeowners of color also experience lower average housing cost burdens than White renters.

Homeownership Helps Protect Households from Inflation

The major affordability benefits of homeownership accrue over time. Rising rents and rising home prices affect renters and owners differently. Residential leases are typically renewed each year and renewal is often accompanied by a rent increase designed to offset rising costs of property maintenance and management and to reflect other market conditions (such as the overall supply of rental housing).

Unlike renters who are perpetually vulnerable to housing cost increases, homeowners are not directly affected by rising home prices because the largest component of their mortgage payment – principal and interest – is fixed for the term of the loan (typically 15, 20, or 30 years). Even when residential property values are sky-rocketing, homeowners with a fixed-rate mortgage only see their monthly payments increase when their property taxes or homeowner’s insurance premiums go up. Meanwhile, the renter’s entire payment is subject to inflation, at a rate that often exceeds that of other goods and services and may exceed wage growth. Homeownership is therefore particularly advantageous when inflation, which hit a 40-year high in February 2022, (5) is on the rise.

Over time, the homeowner’s and renter’s differing cost trajectories produce starkly different economic outcomes. Figure 8 illustrates this phenomenon by comparing two hypothetical Albuquerque households with annual income of $40,000 (6) and monthly housing payments of $1,345. Both the renter and the homeowner have initial housing expense ratios of 40 percent. When we account for estimated home maintenance costs, the share of the homeowner’s income spent on housing is 46 percent. (7) For purposes of this example, rent is assumed to increase at a rate of 3.85 percent, the annual rate at which the fair market rent for a 3-bedroom apartment in Bernalillo County grew between 2012 and 2022 (8) and taxes, insurance, and repair costs are assumed to increase at a rate of 2.14 percent, the average U.S. inflation rate between 2011 and 2021. (9)

Homeownership Becomes Increasingly Affordable Over Time

The benefits of homeownership become even more pronounced when the housing expense ratios of owners and renters are compared over time. In general, incomes, rents, and other expenses rise over time due to inflation. If a renter’s income and rent grow at the same rate, the share of income they spend on housing, and thus the affordability of that housing, will stay the same. However, although incomes, rents, and other expenses tend to move in the same direction, they do not typically grow at the same rate. If rents rise faster than incomes, as has been the tendency in recent years, the renter’s housing expense ratio will increase, and housing will become relatively less affordable. Figure 9 depicts housing expense ratios for the hypothetical Albuquerque homeowner and renter households whose housing expenses are depicted in Figure 8. Because the owner’s housing payments are relatively stable and wages are assumed to grow at an average annual rate of 3 percent, housing as a share of household income declines over time for the owner. The renter, in contrast, is subject to rent increases that outpace the rate of wage growth and thus experiences increasing housing cost burden over time.

Although this brief is focused on the short term cost advantages of owning versus renting, the enormous boost in affordability that occurs after a homeowner makes their final mortgage payment must be acknowledged. After the mortgage is paid in full, the homeowner’s only housing costs are taxes and insurance (and any maintenance and repair costs). This affordability windfall may be particularly welcome and well-timed if the homeowner is nearing retirement.

False Narratives Drive Poor Housing Policy

Homeownership is attainable for many New Mexico households that currently rent, including those with relatively low-incomes. In fact, the monthly costs of homeownership are often lower than monthly rent payments for comparable homes. Homeownership’s other advantages, including housing cost stability and equity appreciation, make it one of the few ways working families of modest means can build assets and create intergenerational wealth. Homeownership is therefore critical to breaking cycles of intergenerational poverty and closing the racial wealth gap. Why, then, is subsidized rental housing and not homeownership the centerpiece of affordable housing policy? False narratives about the willingness and ability of low-income households to manage their own finances are largely to blame. The U.S. social safety net is characterized by a deep paternalism born of an ingrained distrust of low-income people. This distrust drives the need for complicated eligibility and compliance rules that limit access and discourage upward mobility. Rental housing fits this paternalistic paradigm better than homeownership because rental support can be withdrawn if program rules are violated or income increases, thereby insuring that assistance goes only to those households perceived to be the neediest and that public programs cannot be used to facilitate lasting economic gains or sustainable family self-sufficiency.

Recommendations

Stable, affordable housing is a cornerstone of physical, emotional, and financial well-being. New Mexico policymakers are starting to recognize this and acknowledge the true extent of the state’s housing crisis. The large appropriations made to the New Mexico Housing Trust Fund during the 2022 state legislative session indicate that the State is ready to take action to increase the supply of affordable housing. Homeownership can provide a long-term solution to housing affordability without the on-going, permanent public subsidies and constant administrative oversight required by rental voucher programs. If New Mexico’s effort to improve housing affordability is to facilitate lasting financial security for working families, homeownership must play a central role.

Conclusion

High housing cost burden is a problem for 28 percent of New Mexicans and 47 percent of New Mexico renters. Homeowners, even those with very low-incomes, are less likely to be cost burdened than renters. This is due, in part, to the fact that payments on fixed rate mortgages grow at a much slower rate than do rents and the fact that mortgages, once paid off, result in dramatically lower housing costs. Homeownership is by no means the right solution for every household; but many more New Mexico households could benefit from this opportunity to attain sustainably affordable housing than currently do.

Notes

1 https://tradingeconomics.com/united-states/inflation-cpi

2 Cilluffo, A., Geiger, AW & Fry, R. (2017, 17 July), More U.S. households are renting than at any point in 50 years. Washington DC: Pew Research Center. Retrieved from: https://www.pewresearch.org/fact-tank/2017/07/19/more-u-s-households-are-renting-than-at-any-point-in-50-years/

3 For purposes of this analysis, ‘senior’ households are those headed by someone age 65 or older and ‘working age’ households are those headed by someone age 64 or younger.

4 The U.S. Department of Housing and Urban Development (HUD) sets income limits that determine eligibility for subsidized housing programs including Public Housing, Section 8 project-based housing, and the Section 8 Housing Choice Voucher program. Households with income less than 80 percent of the area median are considered ‘low-income,’ those with income below 50 percent of area median income (AMI) are considered ‘very low-income,’ and households with income below 30 percent of AMI are deemed ‘extremely low-income.’ AMI varies across communities – ranging in 2020 from $141,800 in Los Alamos to $36,600 in McKinley County. In 2020, AMI was $69,100 in the Albuquerque metro, $54,900 in non-metro portions of New Mexico, and averaged $61,900 statewide. Eighty percent of New Mexico’s 2020 median income is $49,520, which is rounded to $50,000 for purposes of this analysis.

5 https://tradingeconomics.com/united-states/inflation-cpi

6 Using data from the 2019 5-yr American Community Survey, we estimate that the average annual household income of renter households in Albuquerque was $40,000.

7 Maintenance costs are assumed to be directly incurred by homeowners, but not renters

8 https://www.rentdata.org/states/new-mexico/2012

9 https://www.in2013dollars.com/us/inflation/2011?amount=1