The American Dream has long been synonymous with homeownership. However, for many low- and moderate-income families, realizing this dream is becoming increasingly out of reach. This is due to several factors, including rising housing costs, stagnant wages, and a decline in the availability of small-dollar mortgages, defined as those for homes priced at $150,000 or below.
Recently, The Pew Charitable Trusts funded two white papers that took a closer look into small-dollar mortgages, titled “Access to Small-Dollar Homeownership in Three U.S. Cities: A Qualitative Analysis” and “The Socioeconomic Consequences of the Decline in Small Mortgages.”
Authored by Craig J. Richardson Economic Consulting LLC, “Socioeconomic Consequences,” found that a key factor contributing to the decrease of affordable mortgages for low- and moderate-income families is the 2010 Dodd-Frank Act, which made small-dollar mortgages relatively more expensive to process than larger loans. This is due to a rise in fixed processing costs per loan and caps on banking fees for smaller loans. As a result, many banks have found it unprofitable to issue these smaller loans, leading to a decline in their availability.
This decline in small-dollar mortgage lending has had a significant impact on homeownership in the U.S., particularly in low-income communities. In many cases, investors and all-cash buyers have stepped in to fill the void, purchasing these homes and either flipping them for a profit or using them for rental income. This has made it even harder for low- and moderate-income families to become homeowners.
The “Socioeconomic Consequences” report explores the decline in small-dollar mortgage lending and its impact on homeownership in three U.S. cities: Philadelphia, Pennsylvania; St. Louis, Missouri; and El Paso, Texas. The report draws on quantitative data from the American Community Survey, the Home Mortgage Disclosure Act, and CoreLogic, and qualitative data from interviews with homeowners and renters in each city.
City-by-City Homeownership Analysis
Craig J. Richardson Economic Consulting found that as of 2022, there were still large numbers of owner-occupied homes assessed at $150,000 or less in each of the three cities studied, particularly in distressed areas. However, the stock of low-cost homes declined from 2007 to 2022 due to home price appreciation.
After the Great Recession, applications for and originations of small-dollar mortgages dropped more dramatically than the stock of small-dollar homes valued at $150,000 or less. These trends were more severe in distressed areas of Philadelphia and St. Louis, but less severe in distressed areas of El Paso.
Between 2007 and 2022, distressed areas saw consistently higher levels of all-cash purchases than affluent areas, despite residents there having lower incomes and less wealth than the city as a whole. This finding suggests that investors are more active in these markets.
Nominal housing prices rose in nearly all affluent and distressed areas between 2007 and 2022. But while price growth in affluent areas was consistent across cities, price growth in distressed areas varied widely, from -4% in St. Louis to 175% in El Paso. Distressed communities in Philadelphia and El Paso experienced a rapid rise in housing unaffordability between 2007-2022 as income growth lagged housing price growth.
In contrast, affluent areas in these cities are becoming more affordable, using the same index. In all three cities, commute times to work are higher for residents of distressed communities than residents of affluent communities, making it more difficult to earn the income necessary to afford a home purchase.
It Takes a Village: Social Ties Key to Buying a Home
The “Access to Small-Dollar Homeownership” qualitative study provides additional insights into the challenges and opportunities associated with small-dollar homeownership. This study was also compiled by Craig J. Richardson Economic Consulting with The Future of Land and Housing Program at New America. The report found that when traditional mortgage loans are not accessible, the culture of a community plays a large role in the strategies used to maneuver through those challenges and access homeownership. Regardless of income levels, it was rare for interviewees to buy a home with a standard mortgage loan without any outside financial assistance. “Local and community culture matters for the homeownership strategy relied upon, with individual initiative, family ties, and personal networks playing key roles,” the report stated.
Renters interviewed expressed pessimism or discouragement about their prospects of becoming homeowners in the near future. There is a gap between reported data and the perception of the availability of small-dollar homes in each city.
Uncovering the Policy Implications on Mortgage & Housing
The report’s findings have several policy implications, including:
- There is a need for policies that support the development of affordable housing and increase access to credit for low- and moderate-income homebuyers.
- There is a need to address the challenges facing smaller lenders in providing small-dollar mortgages.
- There is a need for more research on the impact of the decline in small-dollar mortgage lending on homeownership and wealth building.
Expert Insights: Recommendations for the Future of Housing
The report’s authors recommend several steps that can be taken to address the decline in small-dollar mortgage lending and promote homeownership. These include:
- Supporting the development of innovative mortgage products that are tailored to the needs of low- and moderate-income homebuyers.
- Providing incentives for smaller lenders to offer small-dollar mortgages.
- Increasing education and outreach on the homebuying process.
- Addressing the issue of housing affordability through a variety of policy interventions.
The decline in small-dollar mortgage lending is a serious issue that is contributing to the growing gap between the haves and have-nots in the U.S. By taking steps to address this issue, policymakers can help to ensure that the American Dream remains within reach for all.
