One of the most important questions of housing policy is how the mortgage market will change with the nation’s changing demographics. Families of color will make up 43 percent of the nation’s population by 2030. Yet, families of color have, on average, a much harder time getting a mortgage than do white families. Will the housing market contract as these families become the nation’s majority, or will the mortgage market become more inclusive to accommodate a more diverse population?
Hispanic Heritage Month gives us special reason to focus on this question, because few groups frame it more clearly than Hispanics. They will make up more than half of all new households formed between 2010 and 2020, and more than half again between 2020 and 2030. Yet, according to the American Community Survey, only 45 percent of Hispanic households owned their homes in 2013 compared with 71 percent of whites. If one were to hold those rates constant as Hispanics become an increasing percentage of the pool of homebuyers, the homeownership rate would drop precipitously, causing considerable economic upheaval.
Some of this lower homeownership rate can be accounted for by the lower average age of the Hispanic population. The median age in the Hispanic population is 28, compared with 42 in the white population. Younger people tend to have lower credit scores and less wealth built up, making it harder for them to enter the housing market. It is often especially hard for younger Hispanics, as they are less able than whites, on average, to rely on the wealth of their parents in the purchase of their first home.
But the lower homeownership rate for Hispanics is also driven by weaker credit. While publicly available numbers for credit scores by ethnicity are difficult to come by, we do know that Hispanic borrowers on average have lower credit scores than do white borrowers. It is reasonable to assume that the difference is even greater when one includes those who are not homeowners, as renters tend to have lower credit scores than homeowners, and the Hispanic population has a much higher percentage of renters than does the white population.
This difference in credit score is especially impactful in today’s overly tight credit environment. The average credit score for a borrower today is about 40 points higher than it was back in 2000—by most accounts a healthy time for the market—and overall, the market is simply taking on much less credit risk that it was back then. With their lower average credit scores, Hispanics are disproportionately affected by this tightening, particularly at the Federal Housing Administration (FHA).
The lower homeownership rate among this increasingly central segment of the population is troubling because of the broad economic implications of declining national homeownership, but also because it suggests that an increasing number of Americans will find the benefits of homeownership unavailable to them. Even if one discounts the social benefits of homeownership, as the literature on this is mixed, owning a home has for generations been the primary way the middle class has built wealth, utilized more than the stock market and retirement savings. The predominate benefit here has not come from gambling on appreciation, but through the simple act of paying the mortgage each month, building equity, and with it wealth. This has left the average homeowner with 36 times the net wealth of the average renter.
The answer to the challenge of lower Hispanic homeownership is not to loosen market standards to accommodate families who cannot afford to be homeowners. We have done that before and it was devastating, not only to the economy but also for many of the intended beneficiaries, who found themselves able to purchase homes with loans they could not sustain. The answer is instead to increase the number of families who are in the financial position to be homeowners and to ensure that the market effectively serves all who are.
The most powerful and enduring tool for increasing those in position to become sustainable homeowners is of course creating more good jobs, but there are some steps housing policy can take to help. Much greater availability and funding for the forms of financial counseling that have been shown to lower defaults is one. Another is targeted down payment assistance, in which the government and philanthropic organizations match the savings that those of modest means put toward their first home, so that families have an easier time becoming homeowners and have significant equity when they do.
To make sure the market more effectively serves all families who are in a good position to become homeowners, we need to clear up the regulatory and legal haze that continues to hang over lending and servicing, particularly at FHA. Until then, it will be almost impossible for the market to expand to serve the entirety of the credit box, and millions of families whom policymakers have deemed financially sound enough to be homeowners will remain unable to obtain a mortgage.
More fundamentally, though, we need to recognize that the face of the nation is changing, and our housing market will inevitably change with it. It will either do so by contracting because it cannot accommodate a larger and larger percentage of our citizens, or it will do so by becoming more inclusive because we have found ways to bring a more diverse profile of borrower into the system. The choice is ultimately ours.