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Wednesday, July 30, 2014

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The Effectiveness of Pre-Purchase Homeownership Counseling and Financial Management Skills

Homeownership remains a cherished goal for many people. However, developments in mortgage products and drastic changes in the housing market have made the realization of becoming a homeowner more challenging. Fortunately, homeownership counseling is available to help navigate prospective homebuyers in their quest. But the effectiveness of such counseling over time continues to be contemplated. Previous studies have made important strides in our understanding of the value of homeownership counseling, but more work is needed. More specifically, homeownership education and counseling have never been rigorously evaluated through a randomized field experiment.

This study is based on a long-term (five-year) effort undertaken by the Federal Reserve Bank of Philadelphia on the effectiveness of pre-purchase homeownership and financial management skills counseling. The study improves upon previous efforts by employing a different methodology that relies on an experimental design and tracks study participants’ creditworthiness over time. Download the full report. PDF (49 pages, 829 KB)

Executive Summary

Homeownership represents many things to many people. For some, the home is the focal point of the family unit, the place where cherished memories are enjoyed, from raising children to celebrating special family occasions. For others, it represents the foundation of their financial investments and serves as the basis for accumulating potential wealth in the future. Yet for many, particularly those with low and moderate incomes, it is the elusive linchpin of the American dream. Perhaps the major barrier to the benefits of homeownership for many with low and moderate incomes is past credit problems, which are often aggravated by deficient financial management skills. In addition, many people are intimidated by the mortgage-lending process, stemming from their lack of knowledge of its inner workings. Many people maintain that homeownership counseling is available to navigate a number of the aforementioned impediments. However, the effectiveness of such counseling over time continues to be debated. Previous studies have made important strides in understanding the value of homeownership counseling, but more work is still needed. More specifically, two researchers (Michael Collins and Collin O’Rourke, 2011), who are familiar with studies on the subject, have observed that “homeownership education and counseling have never been rigorously evaluated through a randomized field experiment.”

The Community Development Studies and Education Department of the Federal Reserve Bank of Philadelphia, with the assistance of Abt Associates, a consulting firm, and Clarifi, a nonprofit counseling agency, conducted a study structured to address the concerns raised about previous efforts that examined the effectiveness of homeownership counseling received by first-time homebuyers. In particular, the study employed an experimental design, in which participants were randomly assigned to either a treatment or control group and followed for several years after they had received assistance. Those assigned to the control group received a two-hour homebuyer’s workshop and no other services, while those in the treatment group received the homebuyer’s workshop as well as one-on-one counseling. Additional information was gathered to support the estimates that gauged the creditworthiness of the study participants over time. The study provides valuable insight on the influence of counseling on credit scores, total debt, and delinquencies in payments.

The key findings are as follows:

  • This study improves upon previous research by using an experimental design with participants (only first-time homebuyers) who were randomly assigned to a treatment or control group. This allowed us to counter “selection bias” directly on the part of study participants.
  • The two-hour pre-purchase homeownership workshop and one-on-one pre-purchase counseling benefited those who later became homeowners and improved the financial creditworthiness of those who did not.
  • The benefits of pre-purchase homeownership counseling and money management assistance for the treatment participants who received one-on-one counseling were generally greater in terms of credit scores, total debt, and various delinquency days on payments relative to control participants.
  • Both treatment participants with one-on-one counseling and control participants who became homeowners tended to pay their mortgages in a timely manner overall.

Community Development Studies and Education Department

The Community Development Studies and Education (CDS&E) Department partnered with two organizations for this long-term longitudinal study: Abt Associates and Clarifi. Abt Associates provided data management and conducted both baseline and annual surveys of the participants. Clarifi provided counseling services to participants in both the control and treatment groups.

Additional information about these partners is available on their respective websites listed below. For more information about CDS&E, visit the home page.

About Abt Associates*

About Clarifi*

* Nothing in the text should be construed as an endorsement of any organization or its products or services.

Frequently Asked Questions

  1. Why did the Fed undertake this study?
    The goal of this study is to evaluate the effectiveness of homeownership counseling over a time period that is long enough to examine more than just the initial impact of such counseling on people’s ability to manage their finances.
  2. What are the benefits of homeownership counseling?
    It has short-term and long-term benefits. In the short term, homeownership counseling can help prospective homebuyers determine whether purchasing a house is financially prudent and assist them in qualifying for a mortgage. In the long term, it can provide a continuum of services that can lead up to and include sustainable homeownership, stable neighborhoods, and fewer foreclosures.
  3. How was the study structured?
    The study employed an experimental design in which participants were randomly assigned to either a treatment or control group. These groups were followed for several years after they had received assistance. Those assigned to the control group received a two-hour homebuyer’s workshop and no other services, while those in the treatment group received the homebuyer’s workshop as well as one-on-one counseling. Participants were tracked for four years after receiving the initial services.
  4. Who were the partners?
    The Community Development Studies and Education Department of the Federal Reserve Bank of Philadelphia led the study. Marty Smith, senior community development economic advisor, was the principal investigator.

    The partners of this study were Abt Associates and Clarifi. Abt Associates provided data management and conducted baseline and annual surveys of the study participants. Clarifi provided counseling services to participants in both the control and treatment groups.

    About Abt Associates*

    About Clarifi*

    *Nothing in the text should be construed as an endorsement of any organization or its products or services.
  5. What were the key findings?
    This study improves upon previous research by using an experimental design in which participants (only first-time homebuyers) were randomly assigned to a treatment or control group. This allowed us to counter “selection bias” directly on the part of study participants.

    The two-hour pre-purchase homeownership workshop and one-on-one pre-purchase counseling benefited those who later became homeowners and improved the financial creditworthiness of those who did not.

    The benefits from pre-purchase homeowner counseling and money management assistance for the treatment participants who received one-on-one counseling were generally greater in terms of credit scores, total debt, and various delinquency days on payments relative to control participants.

    Both treatment participants with one-on-one counseling and control participants who became homeowners tended to pay their mortgages in a timely manner overall.
  6. What is different about this study?
    This study employs the rigor of the scientific method by using an experimental design to ensure valid results.

    The study is unusual because it examines the behaviors of actual prospective homeowners as they move toward getting a mortgage and evaluates their postpurchase behavior. It is forward looking. Typically, studies of this nature look backward at data already collected and case-by-case studies.
  7. How many people participated? Where were the participants from?
    The original study sample included 898 participants. In total, 60 members dropped out of the study. All participants were from the Greater Philadelphia area.
  8. How long did the study take?
    The recruitment of participants started in March 2007. Once the participants enrolled, we followed up with them on an annual basis for four years. After all the data were collected, we analyzed them.
  9. How do you justify limiting the control group’s opportunities for homeownership counseling?
    All studies that seek to identify the effects of a specific treatment encounter the same problem. To scientifically assess a treatment’s effect requires that you compare a group that gets the treatment with a control group that has similar characteristics but does not receive the treatment. This is necessary to ensure that any differences in the outcomes of the control and treatment groups can be attributed to the specific treatment, which in this study is one-on-one homeownership counseling.
  10. Why haven’t more studies like this one been undertaken?
    There are several challenges associated with a study such as this.
    1. Counseling partner — It is difficult to find a counseling agency that provides homeownership counseling and is willing to abide by the experimental design.
    2. Recruitment of study participants — It isn’t easy to attract participants who are willing to accept being randomly assigned to a treatment or control group.
    3. Time and cost considerations — A longitudinal study can be costly and requires a commitment over an extended period of time.

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Contact Us

Federal Reserve Bank of Philadelphia
Community Development Studies and Education Department
Ten Independence Mall
Philadelphia, PA 19106-1574

(215) 574-6458 – phone
(215) 574-2512 – fax
info.communitydevelopment
@phil.frb.org

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