Today’s tight credit environment constrained mortgage lending and is disproportionately affecting black and Hispanic households. As a result, these communities have found it harder to take advantage of the low home prices and interest rates that followed the housing market crash, missing an important opportunity to build wealth through homeownership.
The volume of lending overall and to different racial and ethnic groups fluctuated during the boom and bust, according to records released under the Home Mortgage Disclosure Act. Black and Hispanic borrowers took out a greater share of mortgages as housing prices neared their peak, arguably the worst time to take out a loan. As prices dropped and buying a home became more affordable, tightened credit standards left many from these same communities unable to obtain or refinance a loan. From 2005 to 2015, the share of loans made to black and Hispanic households dropped from 23 percent to 16 percent.
While this trend is consistent across the country, each city has a unique story behind its drop-off in lending.
San Francisco and Los Angeles are extreme examples of the national trend—a strong recovery in home prices and mortgage-market activity that is limited to white and Asian homebuyers. While much of the country is experiencing relatively affordable home prices, the housing recovery has been so strong in some parts of California, including San Francisco, that home prices and rents have surpassed their peak levels.
An oft-touted example of a resilient real estate market, San Francisco has seen mortgage activity for black and Hispanic borrowers stagnate. In 2005, black and Hispanic borrowers took out more than 50,000 mortgages, nearly 28 percent of all mortgage originations. By 2015, that share had dropped to 13 percent, about 13,500 new mortgages.
The Bay Area’s booming economy has accelerated San Francisco’s recovery, with the number of jobs in computer systems design and related services nearly doubling from 36,600 in 2003 to 72,500 in 2012, according to the Federal Reserve Bank of St. Louis. But a tilted job market combined with limited space, widening income inequality, and strict lending standards has left the recovery increasingly one-sided.
San Francisco is one of the nation’s least affordable metropolitan areas, along with Los Angeles, which has seen a similarly uneven housing market recovery. In 2005, Hispanic households accounted for 38 percent of Los Angeles’s new mortgages, but by 2015, that share had fallen to 29 percent. Meanwhile, the share of loans to white borrowers rose from 42 to 54 percent.
After the housing bust, a tight credit box and even tighter household budgets meant few low-income families could take advantage of the cheap single-family homes left from short sales and foreclosures. The excess supply spurred investors to buy swaths of properties with cash to profit from rising home values and a stream of rental income, creating a nationwide surge in cash sales.
Cash sales reached 46 percent of all home sales in 2011 and 2012 and stayed at 34 percent at the end of 2015, compared with just 24 percent in 2001, according to CoreLogic.
Miami is a prime example of this phenomenon. Its cash sales share reached 70 percent in 2011 and 2012 and stood at 54 percent in 2015. But unlike most other cities, Miami has long had an elevated share of wealthy foreign homebuyers purchasing vacation or investment homes, especially condos, in cash.
Amid these regional trends, the racial disparity in mortgage lending remains. Hispanic and black borrowers constituted a combined 58 percent of mortgage originations in 2005 but only 49 percent in 2015. Though these borrowers saw significant gains in the number of loans between 2011 and 2012, the totals for both groups remain below 2001 levels.
Detroit is the poster child for cities that have lacked a strong recovery like San Francisco's. The sharp drop in the number of mortgages reflects this ailing Rust Belt city's sweeping economic decline. According to the US Census Bureau, Detroit's population fell from 951,270 to 713,777 between 2000 and 2010 as the auto industry stumbled, jobs disappeared, and the city entered the largest municipal bankruptcy on record. Though the recession took a toll on the entire region, the housing bust still disproportionately hurt minority borrowers.
Detroit is the poster child for cities that have lacked a strong recovery. The sharp drop in the number of mortgages reflects this ailing Rust Belt city's sweeping economic decline. According to the US Census Bureau, Detroit's population fell from 951,270 to 713,777 between 2000 and 2010 as the auto industry stumbled, jobs disappeared, and the city entered the largest municipal bankruptcy on record. Though the recession took a toll on the entire region, the housing bust disproportionately hurt minority borrowers.
Detroit’s downtown, which held a large share of mortgages made to black borrowers during the boom, has remained virtually devoid of new mortgages since the bust. From 2005 to 2015, the number of mortgages in the metropolitan area fell 82 percent for black borrowers as lending within city limits fell off the map. Even white borrowing has dropped off significantly, with the number of mortgages made to white borrowers decreasing 50 percent. Continued investments from the private sector suggest a comeback could be under way, but the mortgage market in the inner city shows no sign of recovery yet.
For a full mortgage market recovery, we need to expand the credit box again. Several reforms can encourage lending to creditworthy borrowers who would have qualified before the housing boom. A return to 2005 and 2006 lending practices would be ill fated, but the pendulum has swung too far. Today’s tight standards have locked out many prospective borrowers from homeownership, disproportionately preventing black and Hispanic families from building wealth and benefiting from the recovery.
Except where otherwise specified, the map and accompanying figures and analysis are derived from 2001–15 Home Mortgage Disclosure Act (HMDA) loan-level data and include all owner-occupied mortgage originations in which the borrower’s race and ethnicity and census tract of residence were fully recorded. Our originated loan data exclude loans purchased by institutions and cover all property types including manufactured and multifamily housing. HMDA mandates the reporting of mortgage loan applications from most, but not all, entities that originate mortgage loans. See page 3 of the latest HMDA reporting guidance on which entities may be exempted. Nonmetropolitan areas are more likely to be incompletely covered in HMDA data. We exclude loans where race and ethnicity information is not provided (by the applicant in a mail, Internet, or telephone application) or not available (e.g., for multifamily properties). The numbers of loans with missing race or ethnicity information are reported in the downloadable data.