Home Sweet What?
Buying a first home — like so many other big financial decisions — isn’t what it looks like on TV. How can we help new generations of Americans learn what to expect?
A few years ago, my partner and I bought our first home. This was an investment that simultaneously allowed us the privilege of generating equity, becoming stakeholders in our new community, and, in true Millennial style, setting our beliefs about simple and generous living on a constant crash course with decisions about expensive upgrades and time-consuming repairs. On the day of the closing, we drove up to the house and awaited the arrival of the realtor and lender. I chided myself for being disappointed that there were no balloons on the mailbox or a big, velvety-red bow tied to the door. We were starting to get anxious after waiting for about 20 minutes. Were they coming? Did something go wrong?
It was at about that moment that the realtor called in a panic, worried that we had changed our minds when we never showed up at the office to sign the paperwork. Apparently, a lender called a “title company” prepares the final paperwork for signatures at their office — not in the new home over polite banter with celebratory balloons, freshly brewed coffee, and decadent muffins. In fact, the handing over of the keys is quite procedural and rather unceremonious. My partner and I still laugh at all the things we did wrong and how little we knew about the home-buying process.
Policymakers are increasingly recognizing that Americans — and young Americans in particular — struggle to make and navigate what happens in the wake of financial decisions like purchasing a home.
My partner and I are not alone in our naivety when it comes to the process of making life’s big financial decisions. Policymakers are increasingly recognizing that Americans — and young Americans in particular — struggle to make and navigate what happens in the wake of financial decisions like purchasing a home. Last week, the President’s Advisory Council on Young American’s Financial Capability, a group of innovators and leaders with expertise in education, finance, technology, and policy, released a final report that acknowledged these struggles and provided recommendations to President Obama for equipping young Americans with financial knowledge and opportunities — the combination of which is termed financial capability. According to the recommendations, we should be able to receive the necessary financial information for purchasing a home at the times when we need it the most — in the midst of calculating mortgage payments, meeting with a realtor, or placing offers. The same goes for other purchases or major life milestones, like opening our first bank account, receiving our first paycheck, taking out student loans, or starting our own business.
In fact, the report places a very high value on financial capability as a means to assist young Americans in traversing a complex global economy while making informed financial decisions. The report asserts a basic right to financial capability, elevating financial capability to the level of other human rights like the freedom of expression or the right to work. Consistent with this assertion, the report’s authors argue that financial capability should be made available early in life through public education. Just like reading and math were deemed critical skills and came to be taught in public elementary schools at the turn of the 20th century, the report recognizes that being able to make informed financial decisions and manage money are critical skills in the 21st century. Moreover, they maintain, financial capability is set of skills developed and sustained over a lifetime that should be timed with and enhance decisions related to milestones like starting to work, going to college, buying a home, or opening a business.
However, the recommendations do not address gaps, imposed and entrenched in many cases by poverty, in the accessibility of financial products.
It is true that young people are inheriting an increasingly complex global economy. My partner and I got a taste of this when we signed our mortgage agreement after the meltdown of the housing market, when 500-page mortgage applications became the new normal. And, while the report’s authors do a good job of making specific recommendations to build individuals’ financial knowledge, they sidestep recommendations to create opportunity. For example, the authors recommend opening a bank account or similar financial product as a way to put financial knowledge into practice. And indeed, this is a recommendation that I support. However, the recommendations do not address gaps, imposed and entrenched in many cases by poverty, in the accessibility of financial products. We get no mention of making bank accounts more affordable for lower-income Americans, reevaluating how credit scores are calculated and used for banking and lending decisions, or establishing the minimum standards of living needed for leveraging financial knowledge to climb the socio-economic ladder.
The authors do not give adequate attention to reshaping the context in which financial knowledge and skills are being put to the test, recommendations that admittedly fall outside the bounds of the report’s purpose. It is easy to understand why the authors do not undertake the task of drafting recommendations for creating financial opportunity, which could undoubtedly be seen as unmanageable or too political and ultimately do little to achieve progress on time-sensitive concerns. Instead, the authors focus on the more achievable approach of teaching young people to fish, so to speak. It is easier to teach my partner and me how to understand our mortgage agreement than to re-imagine lending and housing markets.
This is the difference between an individual and an institutional approach to change. The tension between the two forces us to ask whether it’s better to allocate resources to equip young Americans with financial capability or to re-imagine or restructure the institutions responsible for shaping the types of financial opportunities about which young people need to learn more? Undoubtedly, both approaches are important and needed; however, if financial capability is about teaching people to fish — giving them the right bait and tackle — then this report’s approach can only go so far if the river hasn’t been stocked for the fishing season or if a drought dries up the river altogether.
For the sake of future generations, we cannot sidestep recommendations that address the institutional context in which individual young Americans are making financial decisions. Instead, we should rise to this occasion. Young Americans shouldn’t be asked to shoulder the burdens of an economy in which their financial futures depend so completely on their individual financial capability, or lack thereof. My partner and I were lucky to find ourselves in the market for a new home when interest rates were at record lows and qualifying for a mortgage was easier. We had no control over these circumstances and, despite lacking financial capability, we will benefit greatly for many years from a lower monthly mortgage payment, diverting the extra cash to other expenses. Our Millennial counterparts who missed this small, generational window of opportunity might not be so lucky.
Dr. Terri Friedline is an Assistant Professor of Social Welfare at the University of Kansas, a Research Fellow at New America, and a Faculty Director at the Center on Assets, Education, and Inclusion (AEDI). Follow her @TerriFriedline.
