In an era characterized by financial inequality, there is a corresponding inequality of financial knowledge among U.S. students.
A meager 9% of students have a high level of financial knowledge, able to understand complex financial products. However, four times that (44%) have a low level (or less) of financial literacy, according to the 2012 Programme for International Student Assessment, as cited by the Consumer Financial Protection Bureau (CFPB). The rest fall somewhere in between.
Chances are, California has even more students with a low level of financial knowledge, as California is one of just six states with no financial education requirement for their public K-12 schools. Further, only 20% of teachers feel confident to teach on financial topics, according to the Council of Economic Education.
Financial education ought to start as early as kindergarten, according to the CFPB. As a matter of public policy, this education is to cover:
- in elementary school:
- income sources; and
- how income changes in relation to education, work and skills.
- in middle school:
- labor market changes, in addition to components previously learned in elementary school.
- in high school:
- employee benefits;
- information on entrepreneurs; and
Financial knowledge impacts housing
The housing market has much to gain from homebuyers knowledgeable about saving, investing and borrowing and able to make sound financial decisions. Specifically, more financial knowledge leads to more stable markets.
Currently, a new generation of first-time homebuyers are on the cusp of entering homeownership: members of Generation Y (Gen Y). Gen Y had the misfortune of coming of age during the financial crisis and extended recovery. These individuals entered the workforce earning less income and carrying more debt than their predecessors. Thus, they’ve had difficulty saving up for a down payment.
In fact, just one-third of Gen Y is currently saving for a home purchase, according to a report by Zillow. However, the same report highlights the optimistic view held by this demographic: 87% say they will become homeowners (they’re just lacking a savings plan).
Now, imagine if lenders suddenly started offering zero down payment options, offering to cover transaction costs and throwing in a free iPad to boot. The number of responsible homebuyers (the one-third who are saving) would be quickly joined by those who want to buy a home, but lack the financial ability.
However, these zero down mortgages take the form of treacherous adjustable rate mortgages (ARMs), destined to reset in five years. Don’t worry, the lender says, you can refinance later. But in the meantime, rates will increase (as they undoubtedly will), making mortgages more expensive to obtain (and sustain in the context of an ARM). Further, with no savings put away for hard financial times, if the homebuyer is unable to get out of the mortgage before it resets, they will lack the ability to pay the much higher payments.
Defaults, foreclosure and spiraling home values follow. Sound familiar?
Much of the 2008 housing bust can be pinned on a lack of financial awareness from homebuyers. Lenders made extravagant mortgage as easy as signing on the dotted line (provided only that you had breath and a pulse). Homebuyers were all too ready to take part — but would as many homebuyers have jumped into the market if they had possessed more financial education?
Maybe not. The CFPB suggests each year of a student’s academic career covers:
- earning, income and careers;
- savings and investing;
- borrowing and credit;
- managing potential financial risk and insurance; and
- money management and making financial decisions.
Imagine the havoc avoided if the irresponsible buyers of the mid-2000s had been armed with such pragmatic knowledge.
Flash-forward to today. To protect the next generation of first-time homebuyers from their own lack of financial knowledge (and generally undesirable financial situations), financial education is crucial. Real estate agents are the foot soldiers in this fight again financial illiteracy, helping ensure a more stable housing market in the coming years. This is good not just for the individual buyer, but for broader society as a whole.
Here are some resources from the CFPB to educate your real estate clients on the financial aspects of their home purchase: