Rapidly increasing homeownership in the Hispanic economy is helping fuel business expansion as a growing number of Hispanics tap into their home equity to fund entrepreneurial ventures.
Nearly half of U.S. Hispanic households now own their own homes, up from only two in five 10 years ago. Meanwhile, the Hispanic share of home-equity loans also has grown. Experts see correlation between these trends and the growing number of Hispanic-owned firms, which according to U.S. Census data increased 30 percent between 1992 and 1997.
"It's easier, it's faster, and it's cheaper" for Hispanics to get home-equity credit rather than standard business loans, says Gary Acosta, chairman of the National Association of Hispanic Real Estate Professionals. He says that 62 percent of his organization's members report investing at least a portion of their home equity into their own professional practice.
Between 1993 and 2001, the percentage of home-equity loans given to Hispanics rose from 4 percent to 5.3 percent, according to SMR Research Corp., a Hackettstown, New Jersey, firm that performs research for the National Home Equity Mortgage Association.
"Over the same period, other [ethnic] groups' percentages went down," says SMR Vice President George R. Yacik. "So it appears that Hispanics are catching on to home equity borrowing at a faster pace than other groups."
Mr. Yacik notes that Hispanics' still relatively low share of U.S. home-equity loans likely reflects the timing of their entry into the market. "No doubt [the small percentages are] due to the fact that Hispanics as a group are relatively new to the home-owner pool and haven't been able to build sufficient equity," he says.
But that pool is getting bigger – and along with it, the potential for future business capital and ventures is growing. The share of U.S. Hispanic households that owned a home rose from about 41 percent to more than 49 percent between 1994 and 2004, according to HispanTelligence®, the research division of Hispanic Business, which predicts that the figure will increase to 53 percent by 2012.
The underlying link between homeownership and entrepreneurship has been established in several studies including a Southern California survey by the Community Development Technologies Center that found home-equity loans were among the three most commonly used sources of business self-financing.
The study four years ago found that while credit cards and personal loans were the top sources of business self-financing (41 percent and 22 percent, respectively) 14 percent of the region's minority business owners reported having used home-equity loans to fund their ventures.
Two years after that study, the Ewing Marion Kauffman Foundation found a correlation between owning a home and starting a business. It determined that about 12 percent of male home owners between the ages of 18 and 54 were nascent entrepreneurs – compared with about 10 percent of non-home owners in the same category.
"There's very little availability of capital to fund startups. [But] you will always have friends and family or credit cards or other sources, which would include home equity," says Mari Riddle, executive director of TELACU Community Capital.
Among Hispanic women in that same age group, the comparison was about 6 percent to about 4.5 percent, respectively.
Positive economic trends have helped, too. Hispanics looking to fund business ventures using their home equity have recently been aided by rapid appreciation in the home market and low mortgage rates. Those factors, combined with a dearth of traditional business loans, have led more entrepreneurs to their mortgage bankers.
"Especially in the area of startups, there's very little availability of capital to fund startups, because from a business perspective or lender perspective, it's a very high-risk venture," says Mari Riddle, executive director of TELACU Community Capital, a nonprofit financial development institution in Los Angeles. "When you look at resources of capital for startups, you will always have friends and family or credit cards or other sources, which would include home equity."
Ultimately, business people will make choices between tapping home-equity credit and taking out a business loan based on the fundamentals of entrepreneurship: availability of capital and risk.
Which option is more favorable at any given time depends on factors ranging from the borrower's home-equity level and credit rating to current mortgage rates, Ms. Riddle says.
One advantage of home-equity credit is the simplicity of the risk structure. Only the house itself backs up a mortgage in case of default, whereas business loans are guaranteed by a complex hierarchy of assets, starting with the company's cash flow and then followed by assets such as equipment, accounts receivable, and inventory.
Cooperativa Comunitaria Latina de Crédito, a 4-year-old Hispanic credit union with five branches across North Carolina, is just one agency promoting homeownership as the most direct path toward affluence. "Our strategy is that the way to get out of poverty is homeownership and equity that you build in your home," Chairman and co-founder John Herrera says.
|INCREASING HOMEOWNERSHIP |
Hispanic Home-Owner Households (in 000's)
|(Source: HispanTelligence® projections based on Statistical Abstract of the United States: 2002, and Housing Vacancy Survey Annual Statistics 2002)|
The organization's 25,000 members are just now stepping toward homeownership after regulators approved the credit union's request earlier this year to offer 30-year mortgages with an interest rate of 5.25 percent.
While Mr. Herrera says home-equity loans are not on the credit union's menu of services yet, it's the first step.
"El hogar – the family home – is not just a physical space," Mr. Herrera says. "It provides the financial security and personal security that our children need to succeed in school and to succeed in society."
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