No statistic illustrates the lack of progress to achieve equity between white and black America more dramatically than the gap in homeownership rates between the races. Today the difference is 29 percentage points, 6 points greater than it was 52 years ago when the Fair Housing Act banned discrimination in housing based on race, religion, national origin, or sex.
Homeownership involves more than a place to live. It is the way most American families build financial security, especially African American families. On average, during the last quarter-century, homeownership equity accounted for nearly half of Black and Latino wealth, compared to about a quarter for white families. “The growing racial homeownership gap has widened the wealth gap, as home equity remains one of the most significant wealth-building tools,” says Redfin Chief Economist Daryl Fairweather.
Improving African American homeownership can’t wait for the structural economic and social changes necessary to create a level playing field. The gap won’t go away by itself, at least not within our lifetimes, without a substantial increase in first-time African American buyers. Today, 36 percent of all home buyers and about half of all African American buyers are first-time buyers. The first-time buyer share of African Americans needs to reach 70 or 80 percent to close the gap within the next decade. Black homeownership matters now!
In most ways, this has been a tight market for first-timers. Inventories were low before the pandemic, and by June, supplies of homes for sale were down more than 18 percent. Prices rose 3.5 percent for the one-hundredth straight month of year-over-year gains. Low rates are increasing competition for affordable houses. During the first quarter, Black homeownership remained steady at 40 percent.
Every price increase lengthens the time necessary to save for a down payment. Many first-time buyers save for two to three years in good times. Who knows what’s in store for the pandemic economy?
The lower the down payment, the sooner you can buy a house. However, monthly payments will be larger, and you will also have to pay mortgage insurance on down payments lower than 20 percent. Low down payments are so prevalent today that the median down payment by first-time buyers is now only 6 percent, far below the mortgage industry standard of 20 percent down, according to the National Association of Realtors’ 2019 Profile of Home Buyers and Sellers.
‘Saving for a down payment can be the biggest hurdle for renters wanting to become homeowners. In recent years, a growing number of first-time buyers received help from family members with their down payments. However, due to historical gaps in accessing and accumulating wealth, it’s much more difficult for African-Americans to obtain substantial financial assistance from family members. Therefore, increased access to federal down payment assistance based on a certain income threshold is vital, particularly for African-Americans,” says NAR Chief Economist: Lawrence Yun.
Down payment assistance and homeownership education
That low down payments by themselves result in higher levels of delinquency and default is well-established and is the reason borrowers putting down less than 20 percent are required to take out mortgage insurance.
However, down payment assistance, coupled with mandatory homeownership education, has been shown to lower default and delinquency rates. Because of the wide variety of different formats and curriculums, measuring the comparative effectiveness of homeownership education programs is difficult. Studies have shown that borrowers who took NeighborWorks® America’s National Foreclosure Mitigation Counseling (NFMC) were one-third less likely to become delinquent and were more successful in receiving and sustaining loan modifications. A 2016 study found that pre-purchase counseling helped borrowers lower the odds of foreclosure by 42 percent
A study by housing economist Howard Stegman published last year by the Federal Reserve Bank of St Louis found that down payment assistance programs with mandatory homeownership education are no riskier than loans with a 20 percent down payment.
Fannie Mac and Freddie Mac require applicants for their first-time buyer programs to take homeownership education and homeownership counseling. In January, Freddie Mac launched Credit Smart, an online education course
Homeownership at a younger age increases lifetime equity
Lower payments make homeownership possible at a younger age. The earlier you become a homeowner, the more housing wealth you accumulate over time. First-time buyers who bought their first home between ages 25 and 34 have the highest housing wealth of any age group. At age 60 or 61, their median home equity (in 2015 inflation-adjusted dollars) is close to $150,000.
As the CEO of a national database of more than 2200 down payment assistance and other homeownership programs, I believe that the racial gap in homeownership will shrink only with the widespread use of down payment assistance and homeownership education.
Lenders who provide higher LTV loans coupled with homeownership education and counseling will help to create a new generation of first-in-their-family homeowners and customers for life. The same is true for real estate agents who are the primary influencers of where buyers obtain their mortgage. For the nation as a whole, shrinking the racial homeownership gap will make millions of new homeowners and a more unified the United States.
Those of us who are looking for ways to achieve equity between white and black America can act now to solve the homeownership gap with proven strategies like lower down payments combined with mandatory homeownership education. Let’s stop the handwringing and start a conversation to engage and commit lenders, brokers, builders, policymakers, and African American communities in a solution that will work.