Sunday, April 30, 2017

Beware of the Financial Trap of "Affordable" Housing

Beware of the Financial Trap of "Affordable" Housing.  Based on the true story of Susan and Diane.


Life sometimes delivers us unexpected trouble.  That is what happens to the two heroines of our fictional tale in 1988. Both suddenly became single moms due to the unexpected death of their husbands. Each of them have a good job in the hospital where they work as nurses.  The pay is adequate and steady but cannot replace the income of their departed husbands. To survive, both women must return to work full time.

But even with a full time income, it is not enough to stay in their comfortable surroundings.   After some searching, both moms discover that they will qualify for low income housing assistance.

Diane decides to take the opportunity for affordable housing in Roundtree condominiums in Marinwood,  the apartment is new and the Dixie school system has a good reputation.  The cut in her rent is a welcome comfort and guaranteed for as long as she remains within a certain range of income. She remains at her job level otherwise she would earn "too much" and lose her affordable apartment.

Susan decides not to accept the offer of low income housing.  Instead she decides to work longer hours and improve her professional qualification to earn more money.  She struggles for years with the demands of motherhood, childcare and a career.  Eventually, she begins to earn a respectable salary.  Because she is thrifty, she is able to save for a downpayment for a modest condo in Roundtree Condominiums in Marinwood where 
Diane and her children live in affordable housing. She must pay double what Diane pays for equivalent housing but has the benefit of building equity.. 

Years pass. It is 2014 and both moms have survived their struggles. Finally, with the children out of the home, Diane has the extra money to save for a down payment.

In the 25 years since Diane became single, home prices have gone up  400%.   The condo  Susan struggled to buy for $85,000 is now worth $450,000.  

Diane must now save  $100,000 for a down payment to buy a $450,000 condominum in Susan's complex. Diane must decide whether it is worth investing in the real estate market or simply invest her savings in investments for retirement.

Susan's condominium in Roundtree is nearly paid off.  Her professional qualifications have served her well and now is an instructor at a local college.  She has a great job and $450,000 in equity. 

These mothers deserve our praise.  They have struggled and triumphed over adversity.  They preserved their family and did their best for their children.
Who would you rather be in 2014, Diane or Susan?
Most people would prefer the financial security of Susan.  Diane is still a renter without equity and an uncertain retirement.
Is "affordable" housing a financial trap for the unwary?  

Moral: Ownership provides many benefits over subsidized housing.  A subsidized renter is penalized for improving his/her financial condition with the loss of their rent subsidy and doesn't build savings or equity.  Professional development and ownership provides economic stability that a rent subsidy can never accomplish. 

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