Pandemic-era buying spree plunges homebuyers from minority groups underwater

Home prices are in a free fall in 2022 — and the many homebuyers who jumped on the bandwagon during the pandemic-era buying blitz are beginning to panic.

Nationally, from 2019 through 2021, the average annual homeownership rate increased by:

• 0.7 percentage points for white households;
• 0.9 points for Latino households;
• 2.1 points for Black households; and
• 2.3 points for Asian and other households, including Native American and Pacific Islander households, according to the U.S. Census Bureau.

In fact, the U.S. Black homeownership rate increased for the first time since the 1990s.

Despite the rapid growth rates for households from minority groups during the pandemic, the homeownership rate for white households remains far higher than that of other races and ethnicities. In 2021, the U.S. homeownership rate averaged:

• 74.1% for white households;
• 59.9% for Asian and other households;
• 48.4% for Latino households; and
• 44.2% for Black households.

Homeownership rates for households from minority groups still have a long way to go to reach the elevated homeownership rate of white households. However, the gap is forecasted to continue to narrow in the coming decades, according to the Urban Institute.

While a more significant growth rate for households from minority groups is important, given the systematic racism which severely limits the growth of household wealth, the timing is less than ideal for these groups.

That’s because when minority homebuyer activity hit a decade’s peak in 2019 through 2021, home prices were skyrocketing, fueled by record-low mortgage interest rates and government-issued individual stimulus checks.

Thus, this homebuying wave coincided with the worst time to buy — at the top of the housing cycle.

Now that home values are plunging, recent mortgaged homebuyers are seeing their loan-to-value (LTV) ratio dwindle and go negative. In a word: underwater.

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When homeownership becomes a prison

Homeowners and renters from minority groups tend to face an uphill battle when it comes to building household wealth — the main source of which is homeownership — and this news is no exception.

While on its face, a jump in the homeownership rate of Black, Latino and Asian households is good news for the real estate market and equality in general, the vast majority of these homebuyers who purchased during the pandemic will soon be underwater, if they aren’t already.

When a homeowner falls underwater, their negative equity status prevents them from selling their home when needed, or even relocating for a new job. The homeowner always has the option to exercise the put option in their mortgage — default — which pushes the homeowner toward a foreclosure or short sale. However, these are both devastating events in terms of the homeowner’s ability to own a future home or even rent suitable housing due to the attack on their credit score.

Thus, the underwater homeowner who chooses not to default is stuck in place, chained to their black hole asset and an economic tenant in their own home.

Worse, when prices continue to fall, the homeowner tends to pay a higher mortgage payment than the rent for an equivalent residence, making the choice to stay an even bigger financial debacle for the underwater household.

As the biggest homeownership gains of the past two years occurred for households from minority groups, it will be these groups who suffer the most while property prices continue to plummet.

firsttuesday forecasts prices will continue to contract over the next two-to-three years, slipping below pre-pandemic levels in 2024 and reaching bottom around 2025.

Real estate professionals can get ahead by learning to assist underwater homeowners. Gathering options for homeowners facing negative equity on top of an inability to pay or a need to move will prepare agents to work with a larger share of clients in the down years ahead.

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