12.17.20

3 Surprising Challenges Fragile Community Residents Experience

We know that residents of fragile communities experience immense barriers to opportunities, such as unemployment, lack of quality education options, criminal injustice, and a time tax (e.g. taking three buses just to get to work.) But here are three obstacles to economic mobility that fragile community residents face that you might be surprised to learn.

Arial photo of a fragile community

1. Housing Unaffordability is Not the Only Problem

Many people think there is a great need for more affordable homes and focus on the supply side of the problem. However, what most don’t realize is that it is extremely difficult (and getting harder, according to a recent WSJ article) to get a mortgage loan for a house under $100,000, so many people at the lower end of the economic ladder are consigned to being renters for most of their lives.

In our county, Forsyth County, NC, there are many inexpensive “fixer-uppers” in the $40,000-$85,000 range, but usually only available to all-cash buyers. These buyers, faced with low resale opportunities, typically turn them into rental properties, which may not be well maintained because of the low return for doing so, leading to an ongoing deflation of property values since the 2008 Great Recession (even while the rest of the city’s property values have rebounded.) It is the lack of credit access — a demand-side problem — that is the bigger issue around affordable housing than the supply side.

Unaffordable housing concept graphic

Banks tell us that “it’s too much of a headache” to process small loans that aren’t very profitable, because there are fixed costs for every loan. But the underlying reason for this lack of smaller mortgages is anti-predatory laws in the wake of the 2008 Great Recession that were supposedly meant to help low-income borrowers.

Regulations limit the size of fees that can be charged, but the unintended consequence is that many banks withdrew from the market for smaller mortgages. In 2018, there were 38% fewer mortgage loans in the $10,000-$70,000 range than in 2008. In the $70,000-$150,000 range it was 26% fewer, while those homes above $150,000 saw a 65% increase in mortgages over the same time period.

The change in bank behavior makes sense if these regulations are seen as a fixed cost. As an analogy, people get discounts with bulk-buying toilet paper at Costco. People with large mortgages are like “bulk buyers” of dollars so they get a break on the interest rate. If there was a law that required the cost of one roll of toilet paper to be the same as a bulk purchase, we know what would happen: no rolls of toilet paper would be available on an individual basis.

At the Center for the Study of Economic Mobility (CSEM), we are working on this very issue with the Forsyth County Homeownership Program, where we are the first to analyze more than 500 first-time homeowners who were able to sidestep these troublesome laws. We also hope to educate Federal lawmakers about finding a better balance between protecting consumers and still allowing banks to earn enough profits to offer mortgage products at all income levels, such that everyone has a chance to build wealth through homeownership.

CSEM is also creating a documentary, “The Forgotten Notebooks” along with an extensive report on this program, and is partnering with Forsyth County Economic Development department, MapForsyth and the Tax office. All of these partners have been extraordinarily helpful and trusting as we conduct this first-time-ever analysis.

2. Minor Felony Charges Squash Hiring Prospects

It is extremely difficult to ever get hired once there is a felony charge (innocent or guilty). Unfortunately, in our court system, just to be seen, could take multiple court appearances stretching out over 6-12 months. During this time, the background check will come up with “felony charge pending,” which means that it becomes extremely difficult to get a job.

An expensive lawyer may speed up the process, but for most who are charged, they won’t have the money, consigning them to a life of very limited means or even worse, illegal activity. Also, people get their license suspended for not showing up for court over a speeding charge, meaning that with a bare-bones bus system, they are faced with driving illegally or spending over three hours daily getting to a job that is hopefully near a bus route. With one mistake, this puts many in a painful situation of having to choose to drive illegally to get to work in order to feed their families, or quit their jobs altogether.

3. The Highest Work Tax Is On Those With the Lowest Incomes

Debt concept graphic

Those with low-incomes have options to qualify for and collect social benefits, which were designed to be a safety net. However, once people begin collecting social benefits — food stamps, housing benefits, childcare credits — it becomes extremely difficult to ever have an incentive to earn more money. The reason? Collectively, these benefits roll back nearly as fast (or faster) than income flows in. This is what economists call an “effective marginal tax rate” or EMTR.

For example, for individuals in our county earning between $2,000 and $3,300 a month, each additional $100 earned results in $93 rolled back in total benefits, or an EMTR of 93%. We call this a “disincentive desert.” At one income level, the EMTR spikes to over 1,400%, in what is called commonly called a “benefits cliff.” These so-called perverse incentives have been well-studied from a policy perspective but the complexity of the programs makes it nearly impossible for recipients to anticipate the real-world effect of a wage increase on their lives.

To that end, CSEM is currently developing a web-based program with our partner, Forsyth Futures, that will allow both employers and employees to predict the net impact of a wage increase, and track the EMTR. It will be anonymous and intuitive for anyone to use, even for those without a high school education. The reason: we are planning to work with our employers to get them to think about offering a menu of non-monetary options that will properly incentivize workers and allow them to be rewarded for their efforts. Employers in our city have already indicated a huge desire to participate in this, once we develop the website. While not reforming the problems of the programs themselves, it will still allow people the opportunity to be properly rewarded for hard work like the rest of Americans. Perhaps down the road, it will make a stronger case to lawmakers who will be able to better understand how hard-working people have such a difficult time climbing the economic ladder here in the United States.

These are just three of the many complex obstacles to economic mobility that fragile community residents often encounter. Through CSEM’s faculty research at Winston-Salem State University, along with community engagement and help from our students, we are continuing to develop innovative solutions to address these and other challenges and promote economic mobility in our local community.

Craig Richardson

Craig J. Richardson is the BB&T Distinguished Professor of Economics and the Founding Director of the Center for the Study of Economic Mobility (CSEM) at Winston-Salem State University. Throughout his 30-plus year teaching career, Dr. Richardson has investigated the economics of property rights, regional economics, regulation and global economic development.