The voices of Urban Institute's researchers and staff
April 30, 2018

Expanding small-dollar mortgages can put homeownership in reach for more families

Across the country, it’s hard for families to find affordable housing. Millions of new households will  form over the next two decades, which will continue to create demand for more housing than we are currently supplying. And while we’ve heard a lot about the acute affordable housing crises in high-cost places like New York City and San Francisco, it’s a serious problem almost everywhere in the US.

The affordable housing crisis is often associated with (1) high rents that create serious cost burdens and (2) a limited inventory of available housing (both existing and newly constructed housing at lower end of the market is too slow). We cannot ramp up construction enough to fully fill the gap, so we must make existing homes more available to potential new homebuyers. Our latest research offers insight into the market for existing low-cost single-family homes and the lack of traditional mortgage financing available to purchase these homes with a small-dollar loan.

Mapping sales of low-priced homes

To clarify the size and location of the existing low-cost housing stock, we identified the share of home sales for $70,000 or less in every county for which we had data. The map below shows that many counties—urban, rural, and suburban—have a large portion of home sales in this price range.

share of home sales up to 70K by county

We also found that most sales of these low-cost homes were cash purchases, rather than mortgage purchases. Because few first-time homebuyers can pay cash, the predominance of cash sales means these low-cost homes are not helping families start up the homeownership ladder. Moreover, cash buyers are often investors who rent out rather than move into the properties, which can affect civic engagement in the affected communities.

Mortgage lending in this price range has many challenges beyond the competition that cash buyers present. Lending in this price range is less profitable for mortgage originators thanks to fixed origination costs and the need to deal with the increased difficulty of selling such small loans into the secondary market or selling off the servicing. And the overall tight credit environment exacerbates the problem for many borrowers, especially low-income borrowers new to homeownership, who might be interested in loans of this size.

Where are these low-cost communities?

In 2015, 450,000 homes were sold in low-cost counties, accounting for 10 percent of all US home sales. Yet, only one in five of these sales was financed with a mortgage. That same year, 79 percent of low-cost-county home sales between $70,000 and $150,000 had a mortgage.

To better understand where increased financing for small-dollar mortgages can make a difference, we identified the 300 counties with the highest shares of sales up to $70,000. These counties are in rural areas, urban cores, and outlying suburbs. In each, there is a lack of home mortgage lending, leaving low- and moderate-income families who might otherwise be able to afford homeownership with few purchase options if they can’t come up with the full cash price.

300 counties with largest share of sales up to 70K

In many of these places, low-cost properties make up the majority of home sales, yet the lack of financing for the homes puts affordable homeownership out of reach for many residents.

Case study: Pittsburgh

Pittsburgh could benefit from a more robust small-dollar mortgage market. In 2015, 26 percent of homes in Pittsburgh sold for $70,000 or less, yet only 31 percent of these sales were financed by a mortgage, compared with 89 percent of sales between $70,000 and $150,000.

According to Zillow, the average rent in Pittsburgh is $1,063 a month, and the median home value is $138,900. By breaking this down into monthly housing costs, we see how significant the monthly payment savings could be with small-dollar mortgages. At the median home price, a mortgage borrower would pay just $712 a month at the current prevailing market rate of 4.58 percent, assuming a 3.5 percent down payment and taxes and insurance at 1.75 percent of the home value.

A buyer of a low-cost property with a small-dollar mortgage assuming a house valued at or below $72,450, with a 3.5 percent down payment and taxes and insurance at 1.75 percent would have a monthly housing payment of just $374. The Pittsburgh metropolitan area has a healthy share of low-cost property sales each year.* 

Despite the prevalence and relative affordability of these properties, 35 percent of Pittsburgh households are renters, and 10 percent of households who own homes live in houses valued at or below $70,000. These renting and owning price dynamics indicate the strong opportunity for small-dollar mortgages to be a path for renters to enter homeownership, with room to spare for financing renovations that may be needed on older properties. Access to small-dollar mortgages could jump-start sustainable homeownership for many in this city.

A more robust small-dollar mortgage market could be one solution for increasing homeownership

The existing supply of low-cost properties could be part of the solution to the current affordable housing crisis, but first-time homebuyers and households with limited cash who cannot buy these properties outright need access to the housing finance system. We must look for ways to make more robust, fairly priced, consumer-friendly mortgage lending available to help more households become homeowners.*

Our research indicates that creating new sources of capital that could improve opportunities for low- and moderate-income families to purchase or rehabilitate a low-cost home deserves further exploration and experimentation (link added 5/2/18).

These two sentences have been updated for clarity (5/2/18).

Photo by Hill Street Studios/Getty Images.

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