Is the Racial Mortgage Readiness Gap Shrinking?

According to recent Zillow research, the percentage of Black and white renting families that could easily afford a mortgage payment decreased dramatically during the pandemic. Despite these improvements, there is still a noticeable disparity in homeownership and a disproportionate number of mortgage rejections, indicating that Black families face additional obstacles outside of income-related ones that prevent them from becoming homeowners.

According to the American Community Survey, 38.6% of the 138 million American families did not own a home in 2022. Out of them, almost 6.3 million families were deemed “income mortgage-ready,” which indicates their earnings would enable them to make a standard mortgage payment in their area without experiencing financial hardship.

Key Findings:

  • In 2022, nearly one in ten Black families that did not own were income mortgage-ready—meaning they could afford the monthly cost of a new mortgage for the typical home in their metro area.
  • Rising mortgage rates caused the share of mortgage-ready Black families to decrease to 7.8% from 26.7% in 2012. However, the difference between the share of white families and Black families that can comfortably afford to take on a mortgage decreased from the peak 7.9 percentage points in 2012 to 4.7 percentage points in 2022.
  • While higher home values and higher mortgage rates lowered the share of mortgage-ready families, the median family income of Black renters increased by 37.7% compared to 35.1% for white families from 2012 to 2022.

Approximately 7.8% of Black non-homeowning families were considered income-ready for a mortgage, whereas 12.5% of White families were, representing a 4.7 percentage point difference. While it remains substantial, the difference has narrowed since 2012, when it stood at 7.9 percentage points.

“Despite the significant decline in mortgage affordability in the past two years, millions of families who do not own their home have the means to afford the largest share of a homeowner’s cost—the mortgage,” said Orphe Divounguy, Zillow Senior Economist. “While some families may choose to rent, many are simply constrained. It’s crucial to recognize the existence of additional barriers beyond monthly cost, including access to funds for a down payment and closing costs—as well as other barriers that significantly contribute to mortgage denials, like insufficient credit scores and lack of access to credit. These barriers especially impact people of color.”

Still, when mortgage rates doubled, the number of renting families across all races who could afford a mortgage fell from 12.9 million in 2021 to 6.3 million in 2022. All U.S. renters were impacted by rising mortgage rates and prices, however since 2012, Black renters’ median family income has increased faster than that of White renters. During the years 2012 to 2022, the racial mortgage preparation difference decreased more in the regions where Black family incomes increased the highest.

Among the 50 largest metros, the housing markets where Black families are most likely to be mortgage-ready are:

  1. Detroit (13.3%)
  2. Memphis, TN (12.8%)
  3. St. Louis (12%)
  4. Houston (11.6%)
  5. Cleveland (11.2%)
  6. Pittsburgh (10.9%)
  7. Columbus, OH (10.7%)
  8. Oklahoma City (10.1%)
  9. Baltimore (10%)
  10. Birmingham, AL (9.9%)

According to the report, the majority of Black renting families in Detroit make enough money to buy a mortgage comfortably, followed by Memphis, TN, St. Louis, and Houston.

Racial Disparities in Home Values, Homeownership Rates and Credit Security

Furthermore, large differences remain between Black and white Americans’ rates of homeownership and property values, despite the fact that Black renting families’ wages increased more quickly during the pandemic. In 2022, the percentage of white households that owned a home exceeded that of Black households by more than thirty percentage points in almost half of the 50 largest metros in the nation (73% vs. 44%).

The fact that a typical white family’s home is still significantly more valuable than a typical Black family’s home just serves to exacerbate the problem. The property value discrepancy has narrowed somewhat, but in 42 of the top 50 metro regions, it still stands at more than 10 percentage points.

Housing equity is further hampered by discriminatory lending practices, higher mortgage applicant denial rates for Black applicants, and problems with credit history. The denial rate of mortgage loans for Black applicants was 146% higher in 2022 than for white applicants, which could impede the transfer of wealth between generations in the future. The most frequent explanation given for these rejections is credit history.

Encouraging initiatives that focus on improving access to credit-building and down payment assistance, enacting zoning reforms, and creating and maintaining affordable housing in flourishing communities are essential.

Among the 50 largest metros, the housing markets where Black families are least likely to be mortgage-ready are:

  1. San Jose, CA (0.00%)
  2. San Francisco (0.3%)
  3. Los Angeles (1.1%)
  4. Denver (1.3%)
  5. San Diego (1.7%)
  6. Sacramento, CA (2.1%)
  7. Seattle (2.3%)
  8. Providence, RI (2.3%)
  9. New York (2.6%)
  10. Portland, OR (2.8%)

Low-Income Families Have a Smaller Chance to Be “Income-Ready” to Purchase a Home

Compared to white families who rent, Black renters are less likely to be income mortgage ready due to lower family earnings. While unfortunate, data showed that this disparity has been closing.

Across the U.S., some 73% of non-Hispanic white households and 44% of non-Hispanic Black households report being homeowners. The disparity is comparable for families. Compared to 42% of non-Hispanic Black households, 69% of non-Hispanic white families nationwide are homeowners.

The racial disparity in mortgage readiness is significantly less, despite the significant homeownership gap (27 percentage points) between non-Hispanic white and Black families.

In 2022, there was a differential of about 4.7 percentage points compared to over 8 percentage points a decade earlier between Black and non-Hispanic white households regarding income mortgage-ready status. Specifically, 7.8% of Black families and 12.5% of non-Hispanic White families did not own their home. This is due to the fact that throughout same period, the percentage of white families who are prepared for a mortgage has dropped more sharply, from 34.6% in 2012 to only 2.9%.

Data revealed that the shift was not due to a disproportionately higher rise in white family homeownership, which would have led to a more notable decline in the mortgage-ready share of white families. For both groups, the rise in the percentage of homeowners has been about the same.

In contrast to Black families, whose ownership proportion climbed by 1.4 percentage points, white families’ share increased by barely 1.5 percentage points. Rather, a more significant rise in Black family income might have been a major factor.

While rising costs and borrowing rates are bad for everyone, Black renters’ median family income increased more than white renters’ throughout that period.

To read the full report. Including more data, charts, and methodology, click here.

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Demetria C. Lester

Demetria C. Lester

Demetria C. Lester is a reporter for MortgagePoint (formerly DS News and MReport) with more than eight years of writing and editing experience. She has served as content coordinator and copy editor for the Los Angeles Daily News and the Orange County Register, in addition to 11 other Southern California publications. A former editor-in-chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington, she has covered events such as the Byron Nelson and Pac-12 Conferences, progressing into her freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, Lester is a jazz aficionado, Harry Potter fanatic, and likes to read. She can be reached at demetria.lester@thefivestar.com.
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