Can Better Math Skills Boost the Housing Recovery?

AMA7-11-13Can something as simple as better arithmetic skills prevent another housing collapse? According to a new study by researchers at Columbia Business School, the answer might be yes. After an extensive survey of mortgage holders both before and after the housing collapse, Columbia’s scholars found that a key predictor of mortgage defaults and foreclosures turned out to be basic math skills.

According to CNN Money’s new report on the study, researchers surveyed a large sample of hundreds of homeowners who took out mortgages just before the housing meltdown of 2008, and tracked the outcome of those mortgages after the collapse. Their finding? A quarter of the subjects who scored lowest on basic math skills had defaulted within five years of taking out the mortgage. That compares to only five percent of those in the highest percentile for math.

We aren’t talking about advanced math knowledge, either – simple arithmetic does the trick. Study participants were asked to do calculations such as figuring out the price of a $300 sofa when put on a half price sale. And the findings hold true even when researchers adjusted for the usual factors such as socioeconomic status and education.

The results of the Columbia study also contradict some beliefs about the meltdown. Unscrupulous mortgage lenders were accused of misleading gullible homeowners with complicated mortgage products, which set them up for failure. Careless mortgage lending was also blamed for the massive numbers of defaults from “subprinme” borrowers who weren’t really qualified for home ownership in the first place. Those things were certainly true.

But it turns out that even so, poor arithmetic and budgeting skills were still a pretty potent predictor of success or failure with the mortgage – so much so that some consumer groups are advocating a basic financial skills course as a prerequisite to getting a mortgage.

That may be a bit extreme. But more general math skills might help struggling homeowners become smarter money managers, and that in turn could help keep the housing recovery on track. And for those launching a new career as income property investors, there’s a clear takeaway too.

Financial savvy improves chances for investing success. Staying educated, informed and in control of your investments are core painkillers of Jason Hartman’s investing strategies. That includes staying on top of he financial side of things –mortgages, taxes and other costs — associated with buying and holding investment properties. For investors aiming to build wealth through real estate, doing the math may be a key to success.  (Top image:Flickr/lrargerich)

Background:

Christie, Les. “Bad at Math? You’re More Likely to Lose Your Home.” CNN Money. CNN.com 28 June 2013

The American Monetary Association is your source on monetary policy and financial news.  Read more from our archives:

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