This piece originally appeared in the March 2024 edition of MortgagePoint magazine, online now.
The winding path to homeownership remains difficult for many. Millions of American families do not currently own their homes, with recent Zillow research finding that the percentage of renting families that could easily afford a mortgage payment decreased dramatically over the past decade or so. Rising mortgage rates caused the share of Black households considered “mortgage-ready” to decrease to 7.8% in 2023 from 26.7% in 2012.
There is still a noticeable racial disparity in homeownership rates, along with a disproportionate number of mortgage rejections. In every state across the U.S., Black, Hispanic, and Native American households are less likely to own a home than white households overall, according to the Joint Center for Housing Studies. In 2023, more than 71% of white households owned their homes compared to 59% of Asians, nearly 40% of Hispanics, and less than 42% of Black households. Overall, Black households have the lowest national homeownership rate—an estimated 30 percentage points lower than white families—making the racial homeownership disparity particularly stark for them.
With the overall demographics of homeowners and potential homeowners changing alongside the overall racial diversity of the nation, how is the industry working to evolve to meet these needs of these new homebuyers and to ensure that homeownership remains an achievable goal for all those who can responsibly afford it in the decades to come?
In this first of two parts, MortgagePoint will speak with various subject-matter experts from mortgage lenders and servicers, as well as various government and community agencies, about the changing face of the American home[1]owner/homebuyer, and how the industry is working to stay abreast of their needs.
A Changing Landscape
“Over the past four years, the mortgage industry as a whole has been increasingly focused on advancing homeownership, specifically for first-time and minority homeowners,” said Tai Christensen, President of Arrive Home. Christensen noted that there have already been some visible improvements in the homeownership rate for each of these racial demographics thanks to education and programs such as down-payment assistance and “other targeted industry diversity and inclusion initiatives.”
According to a report from the National Association of Realtors, within the next five years, some 1.5 million Black households, an estimated 775,000 Asian households, and 2.2 million Hispanic households are expected to reach the median age for homeownership. Christensen says even more effort could help raise the percentage of first-time and minority homeowners as programs such as those listed above work to educate homebuyers about their options.
“The three greatest challenges to promoting homeownership in the current market are affordability, interest rates, and inventory constraints,” Christensen said. “The rising prices of homes, coupled with stagnant wages across the country and higher interest rates, make it specifically difficult for first-time would-be homeowners to successfully enter into homeownership. These challenges also affect existing homeowners that could potentially become move-up homebuyers.”
Caroline Isern, SVP of Multi-Cultural Lending for New American Funding, revealed just how significant the strategies implemented to advance homeownership are, as well as what factors will help increase the number of mortgaged households throughout the U.S.
According to Isern, the mortgage industry is actively taking several actions to advance homeownership, including:
- Digital platforms: Many mortgage lenders are embracing digital technology to streamline the homebuying process, making it faster, more convenient, and less costly for borrowers. This includes online mortgage applications, electronic document submissions, and verifying income and assets digitally.
- Education: The industry is investing in homeowner education programs to help prospective buyers understand the mortgage process, including financial literacy, so they can make an informed decision about homeownership. This includes things like seminars, one-on-one coaching, and online resources.
- Affordable housing initiatives: Mortgage lenders partner actively with government agencies and nonprofit organizations to support affordable housing initiatives.
- Homebuyer assistance programs: Mortgage lenders offer specialized programs to assist specific groups of homebuyers, including veterans, teachers, healthcare workers, or residents of underserved communities. These programs usually help with closing costs or other incentives to make the dream of homeownership more attainable.
- Advocacy and policy engagement: The mortgage industry actively engages with policymakers, regulators, and industry stakeholders to advocate for policies that support homeownership and address barriers to housing affordability. These activities include lobbying for sensible regulations, supporting housing finance reform efforts, and promoting initiatives to expand housing supply and affordability, among others.
Isern said that the industry can work to address the needs of traditionally underserved demographics “by continuing to offer an expansive mix of loans, offering tailored products for these segments, providing education, and making sure we are mirroring the communities we serve.”
Isern also noted that exploring alternative credit-scoring models could provide access to a broader range of borrowers, “including those with non-traditional credit histories or lower credit scores.”
Affordable housing solutions were also on the list of potential efforts that could address the changing nature and demographics of the American homebuyer. Isern said that in order to fund affordable housing projects and provide creative financing options, mortgage lenders can collaborate with government agencies, nonprofits, and developers.
Through these initiatives, ongoing affordability challenges may be addressed, and low-income or underserved cohorts can access education and programs needed to help them determine if homeownership is right for them—and if so, how they may best access it.
“We must continue empowering our communities by actively engaging with them, trying to understand their unique housing needs, and tailoring our offerings to serve them better,” Isern added.
For many, there are countless hurdles along the path to attaining the American Dream, but what does the future of homeownership look like for aspiring homeowners?
She added that increasing credit availability and providing cheap housing are two factors to consider when painting the future of homeownership—both of which she says could ultimately help minority communities. She added, “It is imperative that specific mortgage products, initiatives to support affordable housing developments, and programs for down payment are developed.”
“The future of homeownership is influenced by so many factors, including economic trends, policy initiatives, cultural shifts, and efforts from the real estate and mortgage industries to address historical disparities,” Isern said.
Financial education designed to empower individuals and communities of color, as well as financial literacy education and homeownership coaching can help potential homeowners make wise financial decisions and successfully complete the homebuying process if it is right for them. Promoting education on topics such as credit management, budgeting, and mortgage options can also help remove obstacles and provide necessary context and insight about whether homeownership is a responsible and achievable goal.
“Interest rates are still high; affordability is still stretched,” said Tim Ray, Co-Founder and CEO of VeriFast. “We’re seeing people’s overall ability to cover the cost of shelter stretched with inflation and the cost of living. I think that, over the next year, [we will see] a softening in rates that’s going to make affordability better. This should help [aspiring homeowners in minority or underserved cohorts] as the market improves and rates soften for them to be able to then afford houses.”
Generational Disparities and “the Great Wealth Transfer”
Baby boomers currently own an estimated 38% of homes nationwide despite comprising just over 20% of the entire U.S. population, according to the U.S. Census Bureau, with boomers having historically benefitted from factors such as being able to refinance their houses at historically low interest rates.
In 2023, Census data found that just 52% of the millennial cohort, however, are homeowners, compared to a whopping 78% of boomers and 70% of Gen Xers.
“Baby boomers and Gen Xers have higher homeownership rates when compared to millennials and Gen Z,” Christensen said. “As the millennial and Gen Z generations continue to mature, the rising cost of housing, stagnant wages, and student loan debt continue to make it increasingly difficult for them to enter into homeownership. In contrast, older generations have enjoyed far more affordable housing markets earlier in their lives, allowing them to build equity and wealth over the decades.”
That said, Isern explained how the housing market can significantly affect the generational gap in different ways.
- Homeownership rates: For instance, newer generations may find it difficult to purchase a property in periods of sharply increasing housing appreciation, which will result in a growing divide between older homeowners and younger renters.
- Wealth accumulation: One of the main avenues for accumulating wealth is homeownership. It’s possible that generations that were able to buy homes when they were more affordable will have more money and possessions to leave for their offspring.
- Geographic mobility: Younger generations’ ability to move around will be restricted in high-cost housing locations. Their professional prospects and standard of living may be negatively impacted if they are unable to purchase homes in sought-after neighborhoods.
“Baby boomers are downsizing at a slower rate than past generations, which is contributing to the inventory issue,” said Jeff Leinan, Co-President of Plaza Home Mortgage. “Over the next decade or so, the greatest wealth transfer in history is expected to occur. More than $70 trillion will pass on from baby boomers to Gen Xers and millennials. That comes up to about $320,000 per millennial. So, this is potentially a very strong tailwind for homeownership.”
In what is being called “the great wealth transfer” (forecast in 2019 via research by Coldwell Banker), Newsweek recently reported that millennials are expected to hold five times as much wealth as they do today by 2030. While medical costs for aging boomers are also projected to eat into this so-called “great wealth transfer,” what remains will still likely make the difference for many millennials between, for instance, being able to afford a down payment or not. But for those already benefitting from that theoretical influx of wealth, the housing market is still rife with headwinds ranging from affordability to inventory and simple education about the process and responsibilities of homeownership, and even as those factors change, they are certainly not likely to vanish entirely.
Still, while the housing market remains volatile, experts say there are some signs pointing to positive trends in the future. Isern anticipates factors such as increased government and policymaker efforts may help address stubborn affordability headwinds. This includes tax rebates for first-time homebuyers, subsidies for low-income individuals and families, or incentives for developers to provide more affordable housing.
Also, more purchasers will be drawn in and market conditions will improve, as rural and suburban revitalization is expected to continue if people can work remotely. The future of housing is projected to include various housing options, such as co-living and multigenerational housing.
Credit Insecurity, Lack of Credit Knowledge Affecting Homeownership Rates
Having a mortgage can be seriously hampered by credit insecurity or lack of education. To address these problems, extensive efforts must be made to raise financial literacy, expand the availability of credit at reasonable rates, and offer assistance and tools to people to help them overcome obstacles to becoming homeowners.
“Lack of financial knowledge, not just credit knowledge, is a huge factor,” Leinan said. “Consumers, particularly first-time buyers, don’t really understand the mortgage process, what products are available, and how they can improve their chances of buying a home and qualifying for a mortgage.”
Leinan, who expressed the importance and necessity of teaching financial literacy in schools and in society, said much more has to be done by the industry and the real estate sector to educate today’s consumers.
Just 7.8% of Black non-homeowning families were considered income-ready for a mortgage in 2022, whereas 12.5% of white families were financially prepared to purchase a home, representing a 4.7 percentage point difference, according to a recent Zillow report which examined the racial mortgage readiness gap. Per that same report, in 2022, nearly one in 10 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.
However, that same Zillow report also noted that this so-called “racial mortgage readiness gap” is shrinking. While rising mortgage rates have caused the share of mortgage-ready Black families to decrease to 7.8% from 26.7% in 2012, 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.
“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, in the Zillow report. “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.”
Improving Homeownership in Today’s Economy
“There’s a large segment of the population that are renters,” said Scott Gesell, CEO and General Counsel of Gateway First Bank. “That being said, it’s disproportionate for certain groups out there, and there’s a number of issues that come into play.”
Due to inflation and other cost increases, everything has increased by 17–20% in the last two years. Paychecks, in Gesell’s opinion, haven’t kept up with that.
“We’re starting to see an uptick in people’s reliance on credit cards and credit debt again,” he said. “So, I think we’re going to go through a cycle where [credit is] going to get pretty tight again for a while, and with interest rates, where they’re at, it’s just going to exacerbate the problem.”
Although perhaps not as quickly as in the previous several years, home prices are projected to climb in the upcoming year. Affordability has been negatively impacted by rates, which are still close to 7%. The Federal Reserve is expected by most to provide some help in the future.
According to Leinan, this may encourage some sellers to come off the fence, which would improve the inventory crisis in some regions.
“As an industry, we have done a good job of creating products that solve for issues like smaller down payments, low credit scores, alternative income streams and property conditions,” Leinan said. “Where we, as an industry, have more work to do is creating awareness of these products and their benefits and overcoming commonly held perceptions and misperceptions.”
With older generations aging in place, many younger buyers have been priced out of the housing market by record home prices, persistently low inventory, 22-year-high mortgage rates, and bidding wars with cash- and equity-flush buyers. First-time homebuyers accounted for just 32% of all deals last year, marking the fourth-lowest percentage in more than 40 years, according to the National Association of Realtors (NAR).
While the industry is doing its part to advance homeownership across America for all races and generations, headwinds remain. There are no definitive signs that inventory constraints will ease anytime soon. If interest rates begin to decline later in the year, as predicted by experts, this could result in additional housing supply shifting in different areas, making more homebuyers eligible to qualify for loans.
While providing more affordable housing may take a while, ongoing efforts to address housing affordability issues through policy interventions and community development initiatives will further improve access to homeownership and affordability throughout the nation.
Although many Americans still want to buy a home, they are waiting for mortgage rates to decrease in order to make that happen. With today’s high mortgage rates and home prices, many potential buyers have refrained from entering the housing market in 2023. But that doesn’t mean the hope of the American Dream is lost. While uncertain, 2024 may offer buyers more opportunities to become homeowners.
