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For low-income minority homeowners, another major factor contributing to housing troubles is the heavy concentration of high cost (subprime) loans in low-income minority neighborhoods. According to the Department of Housing and Urban Development (HUD) estimates of all loans issued between 2004 and 2006, the median share of high-cost loans in low-income minority neighborhoods was 50 percent, while the median share for low-income white neighborhoods was approximately 30 percent. In other words, during this time, high-cost loans made up more than half of all loans in half of the nation’s low-income minority neighborhoods. At the same time, high-cost loans made up less than one-third of all loans in half of the nation’s low income white neighborhoods.

The increased use and availability of high cost loans during the boom affected the ability of minorities to build wealth, since higher interest rates reduce the share of a home payment that is put toward lowering the principle and increasing the equity in their homes. Less home equity puts a homeowner at risk of being pushed underwater by falling house prices. Even before the recession began, the share of minority homeowners with equity cushions of less than 5 percent of the home’s value was twice as high as that of whites (6.9 percent versus 3.4 percent).

Home Equity Erosion

The recent housing downturn has had a dramatic and widespread impact on house prices and wealth. After last year registered the first nominal annual decline since National Association of Realtors records began in 1968, median home price declines accelerated to 9.8 percent in 2008. As of the first quarter of 2009, US median existing home prices had dropped nearly 30 percent from the peak and over 40 percent in dozens of metropolitan areas. While the worst hit markets were Midwestern states ailing from extended periods of job loss and recently overheated markets in the South and West, home price declines were widespread and wiped out five or even 10 years of gains in dozens of metropolitan areas across the country.

In most metropolitan areas, low income neighborhoods have experienced the largest home price declines. According to the S&P/Case-Shiller tiered home price indices, which separate housing markets into three equal segments according to price, declines among the bottom tier have been significantly higher than those of the middle- and high-tier segments. In fact, in all but one of the 17 metropolitan areas covered by the index, through the end of 2008 low-tier price declines exceeded those of the high tier of the market. Some differences were significant. Boston and Washington D.C. have seen prices at the low end of the market decline more than twice as far in percentage terms as high-end homes. In San Francisco, declines were more than three times sharper.

The sharp decline in home prices, especially among the lowest-priced tier of homes, has had a huge negative impact on the wealth of low-income homeowners. Housing wealth is much more evenly distributed among income groups than stock and other forms of wealth, and therefore a more widely held form of wealth for low-income households (Figure 3). Low-income homeowners are especially vulnerable to housing downturns because they have much higher shares of their wealth tied into their homes (nearly two thirds of a low-income homeowner’s median total net wealth, as compared with just one third of an upper-income homeowner’s total net wealth).

While low-income householders on average have high shares of wealth in their homes, the increased use and availability of high-cost loans during the boom impacted the ability to build wealth, since higher interest rates reduce the share of a home payment that is put toward lowering the principal. Part of the large increase in debt levels during the boom was the conversion of other debts into housing debt. By converting other high-interest consumer debt into low-interest mortgage debt, borrowers were able to lower their overall debt payments while increasing their debt loads. But this put them much more at risk in the event of default, for unlike credit card debt, these mortgage debts cannot be discharged in a bankruptcy settlement. Also, unlike credit card debt, there is no minimum payment (unless a payment-option loan) because mortgage payments must be made in full or borrowers risk going into default and potentially losing their homes to foreclosure if they get behind on their payments.