Minority Report – theMReport.com
This piece originally appeared in the March 2022 edition of MReport magazine, online now.
The wave of refinancing that has driven mortgage market volumes over the past two years is rapidly fading as the threat of higher interest rates looms.
It goes without saying that in such a market climate, loan officers will have to turn their attention to the buying market.
Of course, that’s easier said than done, but here’s a quick roadmap that lenders should also consider when turning their attention to a new buyer demographic.
Consider this: Latinos are the only demographic group in the United States to have increased their homeownership rate in each of the past six years, according to analysis by the National Association of Hispanic Real Estate Professionals. (NAHREP) 2021 homeownership data from the US Census Bureau. Current Population Survey/Vacant Dwelling Survey.
The data shows that Hispanic households have been on an upward trajectory in 2021 despite one of the toughest housing markets for first-time buyers in history. In 2021, the homeownership rate for Hispanics increased to 48.4%, adding a total of 657,000 new Hispanic homeowner households since 2019. Additionally, Hispanics added 1,025,000 net new households, which accounts for 27% of the growth in household formation over the past two years.
More than half of the growth in homeownership over the past decade has come from the Latino population and there is so much potential for future growth. In our recent internal analysis, we dig deeper into the numbers, creating a clear outlook for this type of loan in 2022.
The age structure of the Latin American population – which, at an average age of around 29, is about 14 years younger than the general population – is a major contributor to the strong growth in the rate of home ownership, according to NAHREP. In 2020, nearly half (43.6%) of Latino homebuyers were under 34, compared to 37.3% of the general population.
Today, nearly one in three Latinos are currently in the early years of home buying (age 25-44), according to data from the US Census Bureau.
Key findings from a recent Urban.org analysis show that over the next five years, 75% of all first-time home buyers will be women, millennials or people of color, and all growth household net worth will come from households of color. Between 2020 and 2040, there will be 16.1 million net new households. Hispanic households will increase by 8.6 million, households of other races (primarily Asian households) will increase by 4.8 million, and black households will increase by 3.4 million. White households, on the other hand, will decline by 0.6 million.
This demographic development shows that the net growth in the number of
owners from 2020 to 2040 will be entirely among people of color, especially Hispanic owners. Between 2020 and 2040, there will be 6.9 million new net owner households, an increase of 9%. Hispanic owners will increase by 4.8 million, owners of other races (mostly Asian) will increase by 2.7 million, and black owners will increase by 1.2 million.
There’s no denying that tapping into this buyer base is essential for loan officers to be successful. But here’s the thing: Although the Census Bureau’s Current Population Survey/Vacant Housing Survey shows that even if homeownership gains among Latinos were positive, they still lag behind the global market.
Overcoming Barriers to Homeownership
Despite the business potential, the fact is that Latinos continue to face critical barriers to homeownership. Latinos are buying homes with an average down payment of 3.5%, and have a median credit score of 668 and a median debt-to-income ratio of 41% – a borrowing profile that may make them more vulnerable thresholds and changes in mortgage underwriting standards, according to the NAHREP study.
Latinos are, therefore, more than twice as likely to use FHA loans to fund their mortgages, compared to their non-Hispanic white counterparts. In 2020, they accounted for 10.7% of all conventional loans. Although FHA financing allows for lower down payment options, loans can be more expensive. In addition to requiring private mortgage insurance, Latinos paid an average of 90% more in closing costs for an FHA loan compared to those for conventional loans, according to the report.
Moreover, this segment of the US population is overwhelmingly concentrated in areas of the country where the housing shortage is most acute. According to the NAHREP report, the lack of affordable housing inventory remains the biggest barrier to promoting sustainable homeownership among Hispanics.
The U.S. real estate market is undersupplied by an estimated 5.2 million single-family homes due to years of underconstruction since the 2008 financial crisis. However, supply chain issues are slowing efforts to put new homes on the market. Homebuilders faced headwinds even before the pandemic — primarily a lack of construction workers and a lack of land available to build — and the pandemic has only exacerbated these issues.
The real estate industry lacks representation and a diversity that reflects its consumer base, and Latinos remain the most underinvested demographic group today. Now is the time to promote minority home ownership and find solutions to the barriers that exist today. There is a strong need to eliminate the racial inequalities that have plagued our communities for generations.
What steps should the industry take to align its strategy and recruitment with these dramatic demographic shifts? My five recommendations (which include some insights from the Urban.org analysis) are that government and industry need to work together to:
- Improve and expand financial education and homeownership readiness and increase visibility, access and types of down payment assistance programs.
- Create loan programs similar to those of the Veterans Administration (VA) with 0% down payment for eligible borrowers.
- Assemble culturally, racially and ethnically diverse teams to more accurately represent the communities served by mortgage lenders.
- Revisit how we qualify borrowers for mortgages and revamp the process to more accurately assess creditworthiness.
- Implement programs that support home ownership for borrowers.
Increasing minority homeownership can transform the financial well-being of millions of Americans and their future generations.
Data shows Latino homeowners have 28 times more wealth than Latino renters – $171,900 versus $6,210. This also correlates with the wealth of black homeowners relative to renters. In the current real estate environment, it might be wise for loan officers to advise their borrowers to buy rental properties to increase their wealth due to the expected growth in rents. According to Urban.org, renter growth will more than double the rate of homeowner growth from 2020 to 2040.
Between 2020 and 2040, there will be 9.3 million net new tenant households, an increase of 21%.
The bottom line is that the increase in buying business for this growing demographic of buyers means that lenders and real estate professionals need to educate Latinos about the value of property, not just as a roof over- above their heads, but as a sound financial investment to build generational wealth.