Home Ownership Represents A Significant Financial Milestone

By Alan Greenspan
SPECIAL TO THE OBSERVER

It's a pleasure to participate in your annual summit on economic development. Given the nature of the conference, I would like to focus on a matter of mutual interest - improvements in asset accumulation in traditionally underserved markets of our household and business sectors and the importance of access to the financing and information tools that promote and sustain this progress.

In our economy, the three principal means for household asset accumulation are through home ownership, small business ownership and savings.

As important as these are for the individual, they also represent distinct and important benefits to the broader economy and, therefore, play prominent roles in the operation of our financial markets and the priorities of our public policy.

The choice to buy a home is a decision to plant a family's roots in a community with all the implicit incentives to make the community thrive. Where home ownership flourishes, it is no surprise to find increased neighborhood stability, more civic-minded residents, better school systems and reduced crime rates.

Just as important is the effect of home ownership on a household's ability to accumulate assets. For more households, home ownership represents a significant financial milestone and is an important vehicle for ongoing savings.

The Federal Reserve's 1998 triennial Survey of Consumer Finances indicates that home ownership represented 44 percent of gross assets for families earning $50,00 or less annually. Further, investment in residential property has been generally more stable than other types of investment, and it is perceived to be largely permanent.

With these important benefits, an increased rate of home ownership has been chosen by unconsciously - capital does not flow to its most profitable uses, and the distribution of output is distorted. In the end, costs are higher, less real output is produced, and national wealth accumulation is slowed.

By removing the non-economic distortions that arise as a result of discrimination, we can generate higher returns to human capital and other productive resources. Investors and lenders need to understand that failure to recognize the recognize the profitable opportunities represented by minority enterprises not only harms these firms, it harms the lending institutions as well.

Accordingly, we must make further progress in establishing business relationships between the financial services sector and the rapidly growing member of minority- and women-owned businesses.

Doing so is crucial since pursuing the obviously worthwhile goal of increasing home ownership in minority communities also increases the debt of homeowners in these communities. Debt cannot indefinitely be pyramided against home equity as the principal or sole asset.

Developing non-home equity, largely through small-business ownership, not only enhances home ownership among business owners in minority communities, it more importantly offers a source of risk capital to budding entrepreneurs in that community.

Household saving, of course, is a fundamental component for increasing financial capacity and serves as a starting point for the accumulation of future tangible assets, such as homes and businesses.

It is also a source of funding for education, which can materially improve future earning capacity. In the 1998 Survey of Consumer Finance, the top three reasons for saving given by respondents were retirement, liquidity and education. These survey data, once again, exhibit positive trends among lower-income and minority populations.

Some progress is being made regarding the ownership of financial assets by families in arrangements - provide consumers with increased access to various credit and savings instruments.

Community-based organizations have contributed in this evolving marketplace by helping to ensure that traditionally underserved populations and geographic areas are able to achieve gains in asset accumulation.

And, as in the broader economy, market-driven innovation has advanced community development, enabling community-based organizations to more effectively respond to the needs of the communities and families they serve.

Community development organizations working in partnership in financial corporations and governments have created new intermediaries - community development corporations, micro-business loan funds and multibank and investor loan pools, among them - to provide financial opportunity for lower-income individuals and families.

These innovators have succeeded in developing new approaches for engaging disadvantaged participants in the economy in the same manner that any successful organization does - by assessing need, evaluating risks, managing costs and developing appropriate products.

Educational and training programs may be the most critical service offered by community-based organizations to enhance the ability of lower-income households to accumulate assets.

Indeed, analysts have shown that a comprehensive understanding of basic principles of budgeting and saving, at the start, increases household wealth in later years.

Education can also increase economic opportunity by enabling individuals to overcome their reluctance or inability to take full advantage of technological advances and product innovation.

As market forces continue to expand the range of financial services, consumers will have more choice and flexibility in how they manage their finances, and they will seek instruction in the use of the new technologies to help formulate better decisions. Financial Community Affairs staff recently hosted several well-attended educational programs for Federal Reserve employees, providing information on qualifying for a mortgage and managing debt.

The Community Affairs and Public Information offices at the twelve Federal Reserve Banks also have joined together, with the strong support of Governor Gramlich, to promote both local and national financial literacy and economic education programs.

The Community Affairs Offices help financial institutions, community organizations and local governments increase economic opportunity in distressed neighborhoods through strategic partnerships.

The offices provide information on innovative funding strategies for community economic development. And they seek new ways of measuring the effectiveness of financial literacy programs. In our call for papers for the Community Affairs Research Conference scheduled for the spring of 2003, we have asked for studies that evaluate the effect of such education initiatives.

Measurements of the quality and long-term success of these efforts will be particularly useful to the Federal Reserve System as we develop and distribute financial and economic literacy products.

In conclusion, I encourage community groups such as those represented here to continue productive partnerships and activities that have yielded much progress in increasing the assets of their constituencies. With your continued commitment and market-driven product innovation, the prospect for increased economic opportunity for traditionally underserved markets remains promising.

EDITOR'S NOTE: This is a speech given by Alan Greenspan, Chairman of the Board of Governors, Federal Reserve System, at the Ninth Annual Greenlining Economic Development Summit, held in January 2002 in San Francisco.