The hurdles continue to pile up for homebuyers in 2022, with some groups likely to feel more pressure than others.
Home prices in California are up 19% year over year in January 2022. At the same time, mortgage interest rates have surged in recent months. For example, the average duration of 30 years fixed rate mortgage (FRM) The interest rate fell from 3.2% a year ago to 4.7% at the end of March 2022. The result for purchasing power has been devastating, with far less mortgage money available for home buyers. today because of the rise in interest rates alone.
Today’s record house prices and rapidly accelerating mortgage interest rates are impacting homebuyers from all walks of life. But – in the absence of a decrease in buyer demand — the rise in interest rates will make home ownership even more inaccessible for the groups that are most dependent on mortgages.
This is especially true for groups of buyers who are already at a disadvantage when it comes to getting approved for a mortgage – especially households of color – according to the JPMorgan Chase Institute.
Here in Californiathe mortgage application rejection rate is:
- 10% for white candidates;
- 10% for Asian applicants;
- 13% for Latinx applicants; and
- 16% for black candidates, according to data collected during the 2020 Home Mortgage Disclosure Act (HMDA).
The disparity in mortgage denial by race and ethnicity is clear. While systemic discrimination plays a role, the high mortgage denial rates for non-white and non-Asian households can be attributed to many observable factors, including:
- Deposit amount ;
- credit history;
- debt-income ratios (DTIs); and
- job security.
For example, the average black American mortgage applicant indicated a down payment of 3.5%, well below the average applicant’s 8.9% down payment for all races, according to Zillow.
With less skin in game, lower down payments mean higher risk for the lender. As a result, low-down payment mortgages are turned down more often — and when they are originally, the interest rate tends to be higher to cover the lender’s (and mortgage servicer’s) higher risk of loss.
With interest rates already rising rapidly in 2022, homebuyers who were on the verge of rejection before will fall into the gap, unable to reach home ownership.
Black mortgage applicants were turned down almost twice as often as white applicants
Rising interest rates are widening the gap between homeowners
First-time home buyers – who lack equity (cash) from a prior home sale – stand to lose the most from today’s interest rate hike. Those with access to down payment gifts will be the exception.
In fact, parental wealth transfers, including down payment gifts, account for 30% of Black-Whites. home ownership gapas shown by a study of Consumer Financial Protection Bureau (CFPB). In the United States, young white households are twice as likely to be owners as are the young black households.
Increasingly unable to access mortgage financing, the generational homeownership gap will continue for today’s potential buyers.
But there are some steps real estate agents and brokers can take to help mortgage buyers navigate today’s higher interest rate environment.
For example, there are special down payment programs for first-time home buyers that can be found in local communities. Also, suggesting homebuyers check out their local credit unions rather than the big banks can lead to more mortgage options. All mortgaged homebuyers should go to at least three lenders to secure the best rate and terms.
When all else fails, it’s worth continuing to encourage buyers to build their down payment and track their progress over time.