Hispanic Homebuyers Will Be Critical for the Next Housing Market Recovery. Here’s Why They May Struggle.
The Urban Institute tackles the trends indicated by NAHREP’s 2019 State of Hispanic Homeownership Report in this powerful blog post.
By Caitlin Young and Jung Hyun Choi
May 6, 2020
During the Great Recession, Hispanic households suffered the greatest losses of household wealth of any racial or ethnic group. Now, a decade later, Hispanic households compose an increasing share of the US population and have been a major force behind the national growth in homeownership.
Hispanics are the fastest-growing US demographic, accounting for 57.6 percent of total population growth in 2018 and 40.4 percent of growth in household formation over the past decade. In fact, during that same time span, Hispanic homebuyers accounted for 51.6 percent of total US net homeownership growth. In 2018, the US Hispanic population contributed $371 billion to the housing share of gross domestic product, or 10.9 percent, compared with $100 billion, or 6.5 percent, in 2000.
The latest comprehensive review of Hispanic homeownership reveals that Hispanic homebuyers contributed significantly to the post-2007 housing recovery. But Urban Institute analysis suggests that Hispanic recovery from the COVID-19 crisis may not be as robust.
Three factors that will hurt Hispanic households’ ability to lead us out of the current crisis
Most Hispanic workers are in their prime homebuying years, and roughly one in four Latinos is a millennial. As of 2018, 4.9 million Hispanic millennials had the necessary credit characteristics to qualify for a mortgage. Many Hispanics are moving to and buying homes in low-cost states like Georgia, North Carolina, and Washington.
If their finances weather the COVID-19 crisis well, the relative youth and high labor force participation of Hispanic households could play a big role in helping the housing market recover. But we’ve identified three problems that could make homeownership harder for these households as credit tightens in response to the crisis.
- They have high debt relative to income. Hispanic borrowers are highly concentrated in California, New York, and Texas, where housing costs are high relative to national averages. In 2018, Dallas, Houston, New York City, Phoenix, and Riverside added the most Hispanic homeowners, but of the five, only Houston has a median property value below the US median.Because of their concentration in high-cost markets, Hispanic homebuyers have high debt-to-income (DTI) ratios on average. The median DTI ratios for Hispanic homebuyers was 42 percent in 2018, compared with 28 percent for all US homebuyers, and more than one-third of Hispanic homebuyers had DTI ratios above 45 percent. Underwriters consider a borrower’s DTI ratio when awarding a new mortgage, so creditworthy borrowers with high leverage, including many Hispanic borrowers, are disproportionately affected.
- They have smaller down payments. Hispanic households typically make small down payments, with the 2018 median down payment for Hispanic homebuyers at 3.5 percent, compared with 10 percent for all homebuyers. More than 70 percent of Hispanic homebuyers purchased homes with less than 10 percent down. As such, Hispanic homebuyers are more likely to acquire the more expensive Federal Housing Administration (FHA) mortgage, which accepts as little as 3.5 percent down, and pay higher monthly mortgage payments.
- They have more vulnerable incomes. A higher share of Hispanic workers is employed in the industries and occupations that are most vulnerable to the COVID-19 pandemic’s economic ramifications than any other racial or ethnic group. About 11 percent of the Hispanic labor force works in food and accommodation, compared with 7.6 percent of the general population, and about a quarter of Hispanic labor force participants are service workers, compared with 17.8 percent of the general population. Additionally, many Hispanics do not have Social Security numbers and are not eligible for stimulus checks and face greater barriers to receiving unemployment insurance benefits to weather financial instability.
Five recommendations to strengthen Hispanic homeownership
Without quick and appropriate policies, Hispanic homeowners and future homebuyers may be hit harder by the pandemic’s economic fallout than the general population.
- Immediate federal intervention. In the short term, we need to protect existing homeowners and protect renters, who are more vulnerable than homeowners in this crisis, so they do not lose financial means to become future homeowners. The FHA, the US Department of Veterans Affairs, the US Department of Agriculture, and Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) have already implemented foreclosure moratoriums. The FHA and the GSEs have also offered mortgage forbearance to borrowers affected by the crisis.
- Creating tools to measure accurate incomes. In the long term, we need better mechanisms for measuring income if we want to protect Hispanic homeownership. Between 2013 and 2018, self-employed Hispanic borrowers increased by 16.2 percent, compared with 6 percent for the general population. Hispanics are also more likely to live in multigenerational households where mortgage payments come from more than just one borrower and a coborrower. Developing better tools for measuring self-employment income and for considering multiple income sources could promote greater Hispanic homeownership rates.
- Supporting existing avenues of assistance. The GSE patch, which currently allows mortgages with high DTI ratios to qualify for the protections provided under the qualified mortgage rule, would also benefit minority and low-income borrowers. Letting the patch expire in 2021 will further disadvantage these already underserved groups.
- Promoting down payment assistance programs. Down payment assistance programs can also benefit Hispanic borrowers, as they are less likely to have significant savings for down payments. The continued operation and expansion of programs that offer low–down payment options, such as Community Development Block Grants, will be necessary for promoting Hispanic homeownership.
- Change land-use and zoning regulations. The nationwide affordable housing supply shortage, which affects all potential homeowners, has hindered Hispanic homeownership in particular. To increase the number of affordable housing units for Hispanic buyers to purchase, we need significant changes in land-use and zoning regulations. Restrictions to both land-use and zoning have increased land and construction costs, which has constrained developers and led to less construction and higher house prices.
The youth and high labor force participation rates of Hispanics position them well to help the housing market recover from the current crisis, but to unleash the power of this demographic, we’ll need to support potential homebuyers and address issues regarding access to homeownership.