African-American homeownership rate continues to wobble
Factors that influence African-American homeownership rates
- Prior to the Great Recession, blacks received more subprime mortgages.
- Blacks represent less than 4 percent of applicants for conventional mortgages.
- Black households have 13 times less wealth compared to white households.
- There is a lack of housing supply, especially for low- and middle-income borrowers.
Decades of slow, steady gains around African-American homeownership rates followed the passage of the Fair Housing Act in 1968. Unfortunately, the Great Recession brought about by the housing crash 10 years ago wiped out much of that progress.
The homeownership rate of blacks was 42.1 percent in fourth-quarter 2017, according to data from the U.S. Census Bureau, roughly a third lower than the national homeownership rate of 64.2 percent. This deficit is even worse when black homeowners are compared to white homeowners. The homeownership rate for whites in fourth-quarter 2017 was 72.7 percent. Additionally, the homeownership rate of African-Americans trails all other ethnicities, including Hispanics (46.6 percent) and Asians, Native Hawaiians and Pacific Islanders (58.2 percent).
The Fair Housing Act, which legally prohibited many types of discrimination in regards to home sales, rentals and financing, precipitated gains in black homeownership that peaked in the mid-2000s when the rate nearly reached 50 percent. But many factors — including the issuance of subprime mortgages that disproportionately targeted African-Americans — reduced the rate back within sight of a 50-year low.
“It’s just an unfortunate sign,” said Alanna McCargo, vice president of the Housing Finance Policy Center at the Urban Institute, a Washington D.C.-based think tank that performs research on a variety of social issues. “The numbers indicate real stagnation and that things have not gone very far in the last 50 years.”
Reasons for the decline
Multiple studies have delved into the issue of disparate homeownership rates between whites and minorities. The National Association of Real Estate Brokers (NAREB), a group that promotes black homeownership, pointed to Pew Research Center findings from 2015 that showed blacks, compared to other racial groups, are much less likely to even apply for a home mortgage loan.
The Pew study found that African-Americans comprise less than 4 percent of applicants for conventional loans, which are most commonly conforming loans that meet the guidelines of Fannie Mae and Freddie Mac, the two major government-sponsored enterprises (GSEs) that purchase home loans from lenders. This is significant because almost half of all residential mortgage loans are purchased by the GSEs.
Many studies have concluded that, on average, African-Americans have lower credit scores, household incomes and education levels than other racial groups. The Pew Research Center also found that white households had 13 times the wealth of black households in 2013, up from eight times the wealth in 2010. The low levels of homeownership among blacks is a significant contributor to that statistic, McCargo indicated.
“I’m certainly a believer that ownership of your home is the way that many families build wealth and economic mobility,” she said. “[To] be able to give back with younger generations — to help with down payments to buy their homes and so forth — that intergenerational transfer of wealth just isn’t happening at the same levels.”
When comparing borrowers with good credit — defined as those with FICO scores above 660 — 21 percent of black borrowers received high interest-rate loans, compared with 6 percent of whites, on mortgages originated between 2004 and 2008, the Center for Responsible Lending said. Loans with annual percentage rates (APRs) at least 3 percent higher than U.S. Treasury rates were classified as high interest.
During the same time period, blacks had foreclosure rates of nearly 10 percent, about twice that of whites. Subprime mortgages, which were issued in much greater numbers to blacks than whites in the years leading up to the Great Recession, were one reason for this disparity. These mortgages had interest rates as high as 8 percent or 10 percent, and often came with interest-only payment periods that left borrowers unable to keep up with payments, once the interest-only period ended and they had to begin paying off the principal as well.
“Home prices, high interest rates and subprime products were certainly a major culprit in the story of the huge decline [in homeownership] we saw after the housing crisis,” McCargo said. “And the numbers support that black families were disproportionately impacted and really have not seen a recovery that others have seen since 2008.”
Another factor affecting homeownership rates across the board is that single-family housing is in short supply. As of December 2017, there were 1.48 million existing homes for sale in the U.S., enough supply to meet demand for 3.2 months, according to the National Association of Realtors (NAR). That’s the lowest level recorded since NAR began tracking unsold inventory in 1999, and represents a 10.3 percent year-over-year decrease.
This means that many African-Americans may be unable to find homes that fit their budget, especially considering the wealth-building issues some black families face. Jonathan Lawless, Fannie Mae’s vice president of product development and affordable housing, said a couple trends may be responsible for the lack of affordable homes. First, there are fewer repeat homebuyers, causing supplies to be reduced at low- and middle-income price points, Lawless said.
“Instead of people moving out of their smaller, lower-cost home into a bigger home, what they’re doing instead is staying in that home for a lot longer,” he said. “Even worse, they’re spending a bunch of money on renovation, which is soaking up labor supply for building. And they’re turning a starter home into a luxury home, so that’s taking that home at that price point off the market.”
Second, the demand for single-family rental (SFR) homes continues to rise more quickly than other housing-market segments, the Urban Institute said. The number of SFRs grew at a 30 percent clip from 2014 to 2016, twice the growth rate for multifamily units. Consequently, Lawless said, there are fewer homes available in the $200,000 to $400,000 range because investors are gobbling them up.
“Single-family rentals are not in the high-end luxury market,” he said. “We estimate that activity alone took 10 years of construction of starter homes off the market.”
Advocates are looking to nudge banks and other lending institutions toward offering more home loan opportunities for blacks. Wells Fargo, for example, announced a plan in 2017 to create 250,000 new African-American homeowners by 2027, committing $60 billion toward that goal.
McCargo believes more can be done, however, and she thinks a good place to start is with Federal Housing Administration (FHA) loans. The FHA insures about 45 percent of mortgage loans obtained by blacks, so keeping that homeownership path “strong and viable” can only help underserved communities, McCargo said.
“We need to make sure lenders stay engaged with FHA programming, which means the FHA has work to do in terms of making it work for lenders, so that they continue to offer the programs,” she said. “We’re looking at a number of things from a number of different perspectives, including FHA servicing and how that might be turning off some lenders.”