What a New Study Tells Us about Homebuyer Education and Counseling
Laura R. Peck, PhD
Principal Scientist, Social & Economic Policy
Debbie Gruenstein Bocian
Senior Associate, Social & Economic Policy
For generations, homeownership has been a gateway to the middle class and a cornerstone of the American Dream. Homeownership is one of the primary pathways to building wealth and financial security for U.S. families. However, as the recent collapse and uneven recovery of the housing market revealed, homeownership poses risks, both to borrowers and to the broader economy. Homebuyer education and counseling are intended to help individuals navigate the complexities of the housing market, make good home purchase and mortgage decisions, improve their financial management skills, and achieve sustainable homeownership and enhanced financial health. Despite the potential for homebuyer education and counseling, a lack of evidence exists on the question of its effectiveness.
In response, in 2011, the U.S. Department of Housing and Urban Development (HUD) contracted with Abt Associates to launch the First-Time Homebuyer Education and Counseling Demonstration, a rigorous, large-scale, randomized controlled experiment designed to provide definitive evidence on the extent to which homebuyer education and counseling indeed improves financial outcomes. In February 2016, the Demonstration completed the enrollment of a diverse sample of over 5,800 low-, moderate-, and middle-income prospective first-time homebuyers across 28 large metropolitan areas, and randomly assigned them to one of three treatment groups or to a control group that received no services. The three treatment groups included: (1) “remote services” that offered online homebuyer education and telephone-based counseling; (2) “in-person services” that offered in-person education and counseling services; and (3) a “choice” treatment that offered a choice of remote or in-person services.
An Early Insights report, just released by HUD, describes the demonstration’s successful implementation, sociodemographic and financial characteristics of the study’s first 2,377 enrollees. Indeed, the size, scope and rigor of the demonstration are unparalleled in this field. The report also reveals findings about the study’s preliminary impacts for the early enrollees: in brief, being offered access to homebuyer education and counseling results in small, favorable impacts on three out of four short-term outcomes tested.
- Improved mortgage literacy. Treatment group members performed better on a four-question mortgage literacy quiz relative to their control group counterparts. This result indicates that the intervention is improving financial literacy, which may associate with better mortgage outcomes.
- Greater appreciation for communication with lenders. Treatment group members were more likely to report that they would contact their lender prior to missing a mortgage payment. This finding indicates that education and counseling successfully are encouraging participants to engage productively with their lender in times of distress.
- Improved underwriting qualifications. Treatment group members were more likely to have a credit score of 620 or higher, relative to their control group counterparts. This threshold proxies the minimum credit score needed to qualify for conventional mortgages. The finding implies that education and counseling are helping treatment group members push their credit score over the 620 threshold, which might involve correcting inaccuracies in their credit reports or reducing bad credit events such as late or missed payments.
- No evidence of improved budgeting practices. Treatment group members are no more or less likely to compare a budget to their actual spending, relative to their control group counterparts.
- While these results are preliminary and only for the study’s early enrollees, they are encouraging because they represent important steps along the path toward homeownership sustainability and financial health for low- and moderate-income families.
As the study progresses, we will estimate the impact of homebuyer education and counseling for the entire study sample, as well as explore the relative effectiveness of in-person vs. remote modes of service delivery, and how services impact different subpopulations. Such analyses will provide evidence to help craft effective and efficient policies for promoting sustainable homeownership and improving households’ financial well-being. We hope you will continue to follow this study: (1) the release of a complete baseline report, detailing the study’s research design, implementation and participants’ characteristics, is anticipated later this year; (2) an interim report with 12-month outcome and impact estimates on the full sample by early 2018; and (3) a final report expected in 2020 (subject to funding availability). The study expects to follow participants for 42 months to examine how the impact of homeownership education and counseling on homeownership and financial outcomes for low- and moderate-income families over a longer time frame, as they work to make the American Dream a reality for them.