Study: Fewer working families can afford a home

by Center for Personal Finance editors

WASHINGTON (3/30/06)--A new study of home ownership trends found that the rate of home ownership for working families with children is lower than in 1978--despite federal efforts to increase that rate. That's largely due to rising costs of housing compared with wage increases, higher health care costs, and an increase in the number of single parents (Center for Housing Policy March 22).

The problem is more pronounced for minority families with children, according to the study.

Although 70% of Americans own their homes, most of the recent gains were among families without children and upper-income families with children.

Contributing to the problem is a shortage of affordable homes and inability to save money for a down payment on low wages (USA Today March 22). Since home ownership is one of the best ways to build wealth over time, much more needs to be done to help families who haven't yet achieved the American Dream.

Consider these tools to build wealth:

Set SMART savings goals. Make them specific, measurable, adjustable, realistic, and time-oriented. Identify spending leaks and establish a spending plan.

Put savings on auto-pilot. Set up direct deposit and automatic transfers through the credit union.

Make use of a variety of saving vehicles--savings account, money market accounts, certificates of deposit, and holiday club accounts. Start an emergency fund as backup so you don't have to rely on credit cards.

Pay off high-cost debt. Start by knowing what you owe, and negotiate with creditors to work out a repayment plan if necessary. Avoid credit repair clinics--they promise to "fix" or erase your bad credit, but they'll charge you a high fee.

Invest for the long term. A small amount invested regularly over time adds up because of the magic of compound interest. Consider dollar-cost averaging, an investment strategy that allows you to invest a set dollar amount each month--say, $25--so you're buying more shares when the price is low and fewer shares when the price is high. This softens the blow of market fluctuations, and it's a convenient method for beginning investors. Have the money automatically deducted from your paycheck and deposited directly into an investment vehicle.

Save for a down payment. Two aspects of home ownership help you build wealth: (1) increase in equity, and (2) appreciation in home value.