A few years past its 2013 municipal bankruptcy, Detroit’s housing market is experiencing a slow and highly concentrated revival in small pockets of the city. But these meaningful improvements aren’t being shared with the area’s African American and Hispanic communities.
Our analysis of 2015 mortgage market data from the Home Mortgage Disclosure Act highlights Detroit’s challenges and compares the largely minority, low-income city’s progress with the larger Wayne County area (52 percent white) which includes Detroit (10 percent white) as well as the more affluent, neighborhoods surrounding the city.* Five points stand out.
Slower pace of new originations: The origination of purchase mortgages in Detroit fell off a cliff beginning in 2007, plunging from 7,756 new mortgages in 2006 to a low of just 203 new mortgages by 2012. And while the 653 new purchase mortgages taken out in 2015 more than triple the 2012 number, it’s still only 10 percent of the 6,599 mortgages originated in the bellwether year of 2001, when borrowers and lenders alike made careful and prudent lending decisions. In the broader and wealthier Wayne County,* by contrast, 2015 originations are 44 percent of 2001 levels.
Stagnant home improvement lending: Given the deteriorated state of much of Detroit’s real estate, home improvement loans are an important tool for the city’s recovery. Yet renovation activity has still not taken off, with only 39 home improvement loans reported for 2015, representing 1 percent of the 3,475 loans made in 2001.
While marginally better than the 21 home improvement loans reported in 2014, these numbers illustrate the continued need for flexible lending programs that encourage financing for rehabilitation and improvements on existing housing stock. In broader Wayne County,* the 615 home improvement loans made in 2015 represent a slightly more robust 6 percent of their 2001 number, but are an 88 percent increase from the 2014 number.
Declining mortgage refinance activity: The past two years have seen historically low interest rates and healthy refinance activity throughout the United States. But Detroit homeowners are not participating, despite recent reductions in underwater loans and rising home equity and home prices. After a slight surge in 2012 and 2013, the number of refinances in Detroit declined over 50 percent to 610 in 2014. In 2015, Detroit refinances declined again and are currently at 5 percent of their 2001 level, compared with 15 percent in Wayne County.
In late 2014, the Federal Housing Finance Agency and the government-sponsored enterprises hosted Detroit outreach events to promote the Home Affordable Refinance Program (HARP). More than half of HARP-eligible Michigan homeowners lived in metropolitan Detroit.
Under HARP, many borrowers can refinance without an appraisal and regardless of how far their homes have fallen in value. HARP has been extended through September 2017, but the lack of serious take-up in Detroit suggests the need to take a closer look at refinance program eligibility overall.
Recent Urban work on the financial health of Detroit’s citizens, for example, reveals that 62 percent of Detroit residents have a subprime credit score and that the median credit score—552—is solidly within the subprime range of 300 to 600.
Declining lending to African Americans and Hispanics: The minority share of purchase mortgages in Detroit remained at an exceptionally high 80 to 83 percent throughout the housing boom. The rest of the country saw a bigger surge in minority borrowing, growing from 18 to 25 percent between 2001 and 2007.
After the bust, however, the minority share of originations in Detroit dropped further than the rest of the country: 43 percent between 2007 and 2015 versus 15 percent in the rest of the country. The 2015 mortgage data show the minority share of purchase loans in Detroit has continued to decline, hitting a new 14-year low of 46.5 percent. In a city with such a large minority population, this decline in minority lending is a big barrier to future broader growth.
Missing small loans: While Detroit home prices have increased, the average home sale price was just $27,000 in 2015. That year, over 95 percent of sales were in cash, almost three times the national average. Cash sales are prevalent in the city, due to lower sales prices and a large number of cash investors. But the lack of small balance lending for potential noninvestor homebuyers is a problem as well.
In 2015, 123 mortgages under $50,000 were made in Detroit—just 18 percent of the mortgages originated in the city. In contrast, over 80 percent of home sales (12,540 homes) were below $50,000, meaning less than 1 percent of these homes were purchased with mortgages.
But small-balance mortgage lending products, always hard to find, are nearly impossible to get. The culprits are likely tight credit and the low profitability of small loans, but without these small mortgages, sales evaporate, houses go to investors who have cash on hand, or families opt to use seller financing vehicles, including land contracts, which often have fewer protections for borrowers than traditional mortgages.
None are optimal for potential homeowners or communities. We recommend exploring financing options that support smaller mortgage lending.
These new, comprehensive mortgage market data affirm that the positive trends and headlines in the Detroit housing data do not benefit underserved residents in the hardest-hit areas of the city. A continued focus on expanding lending programs to meet the needs of these communities, including helping homeowners access small loans, home improvement, and refinance loans will go a long way in broadening the recovery.
*This post was updated on October 20 to clarify that Detroit is a part of Wayne County.