The obstacles continue to pile on for homebuyers in 2022, with certain groups likely to feel more pressure than others.
California home prices are up a whopping 19% from a year earlier as of January 2022. At the same time, mortgage interest rates have surged in recent months. For example, the average 30-year fixed rate mortgage (FRM) rate has increased from 3.2% a year ago to 4.7% at the end of March 2022. The result for purchasing power has been devastating, with significantly less mortgage money available to today’s homebuyers due to interest rate increases alone.
Today’s record-smashing home prices and rapidly accelerating mortgage interest rates impact homebuyers from all backgrounds. But — absent a decrease in homebuyer demand — rising interest rates will push homeownership further out of reach for groups most reliant on mortgages.
This is especially true for homebuyer groups already at a disadvantage when it comes to achieving mortgage approval — specifically households of color — according to the JPMorgan Chase Institute.
Here in California, the mortgage application denial rate is:
- 10% for white applicants;
- 10% for Asian applicants;
- 13% for Latinx applicants; and
- 16% for Black applicants, according to data collected through the 2020 Home Mortgage Disclosure Act (HMDA).
The disparity in mortgage denial across race and ethnicity is clear. While systemic discrimination plays a part, the high mortgage denial rates for non-white and non-Asian households can be traced to many observable factors, including:
- down payment size;
- credit history;
- debt-to-income (DTI) ratios; and
- job security.
For example, the average U.S. Black mortgage applicant listed a 3.5% down payment, well below the 8.9% down payment from applicants averaged across all races, according to Zillow.
With less skin in the game, lower down payments translate to greater risk for the lender. Thus, low down payment mortgages are denied more often — and when they are originated, the interest rate tends to be higher to cover the lender’s (and mortgage servicer’s) higher risk of loss.
With interest rates already rising rapidly in 2022, homebuyers who were on the verge of rejection before will fall into the gap, unable to attain homeownership.
Related article:
Black mortgage applicants denied almost twice as often as white applicants
Higher interest rates widen the homeownership gap
First-time homebuyers — who lack equity (cash) from a prior home sale — stand to lose the most from today’s rising interest rates. Those with access to down payment gifts will be the exception.
In fact, parental transfers of wealth, including down payment gifts, account for 30% of the Black-white homeownership gap, as found in a study by the Consumer Financial Protection Bureau (CFPB). In the U.S., young white households are twice as likely to be homeowners as are young Black households.
Increasingly unable to access mortgage financing, the generational homeownership gap will continue for today’s would-be homebuyers.
But there are some steps real estate agents and brokers can take to help mortgaged homebuyers navigate today’s higher interest rate environment.
For example, there are special down payment programs for first-time homebuyers which can be found in local communities. Further, suggesting homebuyer clients check out their local credit unions rather than large banks can result in more mortgage options. All mortgaged homebuyers ought to apply with at least three lenders to ensure the best rate and terms.
When all else fails, it’s helpful to continue encouraging homebuyers to build up their down payments and continuing to check in with their progress over time.
