Conventional wisdom dictates that people buy new houses in new subdivisions far from central cities to get more for their money. But this calculation is generally made without serious consideration of the transportation costs that come with that house. After factoring in those costs, houses in places with few transportation choices are less of a bargain, both in monetary and quality of life terms. Many families also cannot find affordable housing within a reasonable distance of their jobs, and so trade high transportation expenses and long commutes for lower housing costs. The necessity of owning a car may actually prevent lower income Americans from being able to attain home ownership. Since home purchases are all about "location," new programs that rate the "location efficiency" of a home are a promising way of taking transportation costs into account.

Homes Are A Better Deal Than Cars

Car ownership is often presented as a lifestyle decision, not a financial one. But automobiles have a real impact on the financial well-being of families. For homeowners, spending on buying and maintaining a home (about 20 cents of each dollar spent) has long-term benefits: Mortgage interest is tax-deductible, and the value of a well-maintained home appreciates. Buying and maintaining an automobile imparts no such benefit.

Dollar for dollar, houses are a better investment. The U.S. Department of Housing and Urban Development estimates that the typical home value grew by 3.2 percent per year in the 1990s.¹ If this rate can be sustained, in ten years, a home of average value (worth 133,000 in 1998) would be worth $189,000. Under a standard mortgage, the owner of such a home will have nearly $85,000 in equity at the end of ten years, for a total investment of $180,000 (including mortgage payments, insurance, and maintenance costs) (see Figure K). In contrast, vehicles depreciate rapidly: A new $20,000 car will lose almost 25 percent of its value in the first year, and almost 80 percent of its value over ten years (see Figure L). A car owner who invests more than $41,000 in a car (including payments, insurance and repairs) over ten years ends up with an asset worth only slightly more than $3,700.² Under this scenario, for every $10,000 invested in a home, the homeowner gets a return of over $4,730 in equity. For every $10,000 invested in an automobile, a car owner receives equity of $910. And the equation just gets better for homeowners if values continue to rise; over the life of a 30-year mortgage, a homeowner could get a return of $7,298 for every $10,000 invested.

While purchasing a suburban home reachable only by automobile can appear to be a good deal, it can have negative financial consequences if it results in higher expenditures on cars.

How Automobile Purchases Affect Home Ownership

There is evidence that the need to own automobiles makes buying a home more difficult for families. Vehicles play a large role both in the average household’s expenditures and in its debt load, factors examined when home mortgage lenders assess an applicant’s wealth. A family’s total wealth is calculated by subtracting its total debt load from its assets. The inability to accumulate wealth, largely due to large debt loads, has been identified as the leading constraint in attaining homeownership.³ This subject, and the effect of transportation expenditures on the working poor, will be addressed in more depth in a forthcoming paper from the Brookings Institute.

The largest category of debt outside of real estate is vehicle debt, which makes up 7.5 percent of all debt. Eighty-six percent of all families own or lease vehicles.⁴ In 1999, Americans held $465.7 billion in automobile debt outstanding.⁵ The Center for Neighborhood Technology has calculated that decreasing the amount of automobile debt held by families by 2.5 percent could free up enough money to cover more than a million down payments on the average first home. If used in this way, the decrease in automobile debt could increase the home ownership rate in the United States by one percent.

Families who can go from three cars to two, or two cars to one, will have more income available for mortgage payments, and more savings available for down payments. They become more attractive mortgage applicants than families with large amounts of credit outstanding and high monthly expenses.

However, buying fewer cars is an option only if families have other travel options. Unfortunately, the lower expenditures made possible by living in a convenient, walkable neighborhood with good transportation choices are not taken into account in mortgage lending decisions, putting these homes out of the reach of many buyers. This situation makes it difficult for potential buyers to take advantage of their ability to lower their transportation expenses.

Recognizing the Savings Available from "Location Efficiency"

Capturing the financial impact of location can be addressed through a market-based strategy. The Center for Neighborhood Technology, STPP, and the Natural Resources Defense Council have created a model to quantify the "Location Efficiency Value" (LEV) of areas within metropolitan regions. Just as determining a home’s energy efficiency helps homebuyers gauge heating and cooling costs, "location efficiency" helps homebuyers gauge future transportation costs. In constructing the LEV model, the research team collected an unprecedented amount of data about community characteristics such as compact residential design, availability of shops and other amenities, and pedestrian friendliness. By integrating these factors with travel demand and demographic data, researchers were able to construct a model that predicts cost savings associated with land use efficiency. The Federal National Mortgage Association and local mortgage underwriters have accepted LEV as an accurate and useful indicator of household transportation savings, and with the help of the Institute of Location Efficiency, now offer Location Efficient Mortgages^SM in certain areas.

This chapter presents a location efficiency map for Chicago; maps for Los Angeles, and San Francisco are available on-line. The LEV model shows that on average, households in places with high location efficiency in the Chicago region can spend much less on automobiles than their counterparts in places with low location efficiency – where automobiles are the only way to travel. In Chicago, savings for an average household can range from $100 to $500 per month over what similar households spend in neighborhoods with a low location efficiency.⁶ These savings are calculated for the metro area’s average household; in Chicago’s case, the typical household has an income of $43,000 and is made up of 2.6 people. The savings are calculated by the smallest neighborhood designation available for Chicago, the Census Bureau quarter section (a half-mile square).⁷

Figure M. Location Efficiency Value in Chicago

A household of average income in the shaded area can save $100 to $500 per month on transportation, when compared to a location with a low location efficiency.

[Source: CNT Location Efficiency Model. For more information see Appendix A.]

Annually, households in places with high location efficiency can spend between $1,200 and $6,000 less on transportation than their counterparts in poorly planned developments where shops, schools, and workplaces are far away and generally accessible only by automobile. These savings can be attributed to the option to own fewer cars and take more trips by walking, bicycling, and using public transit.

The Location Efficient Mortgage^SM

The financial benefits of location efficiency are being used in a few cities to help families get ahead. The Location Efficient Mortgage^SM (LEM) allows people looking to buy homes in location efficient communities to borrow more money because they are likely to have lower than average spending on transportation.⁸ This recognition can increase credit availability by $36,000 to $48,000 for a first-time homebuyer with a household income of $50,000.⁹ This has the effect of lowering the minimum annual income needed to purchase a home by as much as $5,000. If widely used, the LEM could result in a five percent increase in the home ownership rate in each region where the LEM is offered.¹⁰ For more on LEM, visit the LEM web page at www.locationefficiency.com.

As of late 2000, potential homebuyers can apply for LEMs in Chicago, Los Angeles, the San Francisco Bay Area, and Seattle. In Chicago, the LEM is available to homebuyers in areas with Location Efficient Values greater than $100 (amounting to 59 percent of the households in the region).

Other Ways Location Efficiency Helps Homebuyers

Other programs are also taking location efficiency into account, mainly through "walk to work" loan programs. Loyola University in Chicago and the University of Cincinnati make low-interest loans for home purchase or improvement available to employees living within a certain distance from the campus.¹¹ Programs are targeted at lower-income workers, and strive to increase investment in the community surrounding the university. Another program in Cincinnati allows potential homeowners of any income to qualify for a bigger mortgage if they are buying within ten blocks of their downtown job. The "Downtown Walk to Work Program" was created by Fannie Mae. In Milwaukee, Wisconsin, many employers are offering $3,000 no-interest loans to help cover down payments and closing costs for workers who buy homes near their workplaces. The program is a collaboration between Select Milwaukee, a non-profit housing organization, Freddie Mac and the Mortgage Guaranty Insurance Corporation.¹² These programs do not directly address transportation costs, but encourage smart growth by ensuring that jobs and desirable residential communities remain neighbors. See Appendix B, for more ways employers can help employees save.

Picking a Home to Save Money on Driving

While Location Efficient Mortgages are now available in only a few places, families everywhere can still look for a home with an eye to lowering transportation costs. Asking a few of these questions can help determine whether the new home would make it easy to save money by driving less or owning fewer cars.

• Are neighborhood schools in walking distance? Can a child walk there safely?

• Are sidewalks in good repair? Are crosswalks well-marked?

• Is there a grocery store within walking distance? A dry cleaner?

• Are there neighborhood parks, basketball courts, and/or ball fields? Are there neighborhood sports leagues?

• How close is the nearest bus stop or rail station? How often does the bus or train run? How much is the fare?

• If someone in the family needed to take transit to work or school, how long would it take them? Is transit convenient for going downtown to a festival or a ball game?

• Do the main streets have bike lanes? Do the neighborhood streets provide back routes for biking to school, the park, or shops? Is work within a bikeable distance of three or four miles, and how hilly is the route?

• Rate the neighborhood’s transportation options by applying a simple test. Do you see people out walking or biking? Do you see people waiting for the bus? Are kids out and about in the neighborhood? What about elderly people?