The Painful Impact of the Housing Downturn on Low Income and Minority Families

The current downturn in housing has seized the markets, pushed home prices down further than any time in generations and has sparked the worst recession since the Great Depression. At the same time, nearly 18 million households are severely burdened with housing costs that consume over half their household incomes. While few have escaped the fury of the recent downturn in housing, tenant, low-income, and particularly minority, households have fared the worst. By Daniel McCue

Figure 1 Affordability Problems Surged During the Housing Boom

With the projected growth in minority households likely to be the greatest source of housing demand in the future, understanding the potential long-term effects of the housing downturn on minority house-holds is critical.

Minorities have been especially hard hit by the current downturn. One significant factor is that minorities are more likely to have low household incomes, and low-income households have fared poorly. Indeed, while one in five white households is low income, the rate for minority households is one in three. Low-income households are much more likely to face severe cost burdens. At last count in 2007, low-income households comprised over 13 million, or nearly three quarters, of the 17.9 million households paying more than half their incomes on housing. Additionally, low-income households accounted for half of the surge of over four million severely burdened households that occurred during the housing boom from 2001 to 2007 (Figure 1).

Even among low-income households, however, low-income minorities are more highly burdened than whites. While rates of severe burden for low-income whites rose from 39 to 43 percent from 2001 to 2007, minority rates increased from 50 to 54 percent. During this time, the number of severely burdened low-income white households grew by 857,000 (13 percent) but the number of severely burdened low-income minority households increased by fully 1.05 million (23 percent).

Working at low-wage or part-time jobs is seldom enough to put an end to these severe affordability problems. In fact, employed workers head up roughly half of all severely cost-burdened households..

But minorities have also been hit especially hard by unemployment during the current downturn, increasing their housing affordability pressures. Unfortunately, the 5.8 million job losses resulting from the recession so far have also been concentrated among minorities. Going into the recession, unemployment rates for minorities were already higher than for whites. Whereas whites entered the recession with an unemployment rate of 4.4 percent, rates were 8.9 percent for blacks and 6.2 percent for Hispanics.

Figure 2 Even Controlling for Income, Foreclosures Are Markedly Higher in Minority Neighborhoods

With higher shares of younger householders more likely to be entry-level employees with little job security, minorities have been more susceptible to job loss and have felt a disproportionate share of the economic downturn. Now in the grip of the recession, as of April 2009, unemployment rates had risen to 15 percent for blacks, 11.3 percent for Hispanics, and 8 percent for whites.

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.

Figure 3 Home equity is much more important to low-income household wealth than stocks, and more evenly distributed across households

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.

Although falling home prices have improved homebuyer affordability in many metros, many homeowners have been left holding inflated levels of debt. While real homeowner equity dropped $2.5 trillion in 2007, mortgage debt levels actually rose by $400 billion. By the end of 2008, mortgage debt surpassed home equity, and debt now exceeds equity by $2.6 trillion.

Falling home values have left millions of homeowners underwater—homes worth less than the outstanding balances on their mortgages. Moody’s Economy.com estimated that in March 2009, there were 14 million such households—and other estimates place this number much higher. Not only have these homeowners lost all of the equity that they may have built up in their homes, but they are also unable to sell or refinance if their mortgage payments become unaffordable.

Rising unemployment and millions of job losses from the current recession means more homeowners simply cannot make their mortgage payments. Many are forced to sell or walk away from their homes. According to Zillow.com, by the end of 2008 over 40 percent of all home sales were homes sold for a loss, many of which were as a result of a foreclosure. Indeed, the National Association of Realtors reported that in the fourth quarter of 2008, 30 percent of all home sales were foreclosures and an additional 15 percent were distressed short sales.

Entering 2009, rising delinquencies and record foreclosures continued to weigh heavily on the markets. By the first quarter of 2009, nearly one in eight mortgaged homeowners was delinquent or in foreclosure. While this includes a dramatic 37 percent of all subprime loans, it also includes fully eight percent of all supposedly less risky prime conforming loans, and prime foreclosures are accelerating. Foreclosures have been especially prevalent in areas that had recently been the hottest housing markets. California, Arizona, Nevada, and Florida alone accounted for nearly half of all homes in foreclosure by the first quarter of 2009. And while nationwide the number of homes in foreclosure entering 2009 was over three times what it was entering 2007, the jump in these four states was nearly ten-fold.

No Picnic for Renters Either

While the decline in home values and housing wealth has been a major issue for low-income and minority homeowners, renters have not escaped harm either. For years, renters have suffered higher rates of severe housing cost burdens than homeowners, and according to the US Census Bureau’s 2007 American Community Survey, at last count nearly a quarter of all renters paid more than half of their pre-tax incomes on rent. Because renters are generally younger, they have lower incomes than homeowners and are also more likely to be in entry-level jobs and therefore more susceptible to job loss in economic declines.

Particularly harmed by the downturn have been those renters unknowingly living and paying rent in properties that have been foreclosed upon because of the delinquencies of their landlords. Reports from the Furman Center for Real Estate at New York Univerisity and the National Low Income Housing Coalition have shown rental properties to be a significant share of foreclosures in the cities studied. Small multifamily rental properties have been especially at risk of foreclosure since many were financed using the same risky lending products and practices that contributed to the record foreclosure levels for homeowners. These small multifamily properties typically charge lower rents than larger properties and are more likely to be occupied by low-income households.

Figure 4 After growing much faster than operating income, rental property values fell in 2008

Small multifamily rentals are not the only properties being impacted by the downturn. Delinquency rates of multifamily mortgage-backed securities were increasing rapidly as of the first quarter of 2009, demonstrating that larger multifamily properties are also being pressured. In total, after rising significantly for several years, real rent growth was flat but trending downward in 2008, while property values declined as buyers demanded a higher risk premium for their investments (Figure 4). With declining rents and property values and increasing delinquencies, access to credit for multifamily properties has been severely constricted. Reduced access to funds may have a negative impact on the quality of rentals as it will be more difficult for cash-strapped property owners to find a buyer or to borrow against their properties to make necessary improvements or repairs.

Looking to the Future

The problems facing minorities may have a lasting impact on housing markets given their expected increase in influence in the next 20 years and beyond. Even assuming that the current downturn will cut immigration to half of recent census projections, minorities will account for 73 percent of all household growth from 2010-2020 which will increase the minority share of the population from 29 percent in 2005 to 35 percent in 2020.

These demographic shifts will be associated with distinctly different changes in household types among whites, blacks, and Hispanics. For example, while the number of white married couples with children is actually expected to decline sharply—by nearly a million from 2010-20—minority married couples with children will grow by well over a million. Therefore, many large suburban homes of today’s baby boomers will be suited from a design perspective to the growing number of minority families. But even though the downturn has increased the affordability of many of these homes, even larger price declines may be necessary if minority families with children become the main source of demand for these homes because they have much lower average incomes and wealth. Making matters worse, incomes of younger householders are not keeping up with those of their predecessors. For the first time in generations, householders in each 10-year age group under the age of 55 will likely end the decade with lower real incomes than their peers at comparable ages when the decade began.

In sum, the current downturn has brought dramatic house price declines, huge losses of wealth for homeowners, record foreclosures, no meaningful relief in cost burdens for renters, and a severe economic recession with millions of job losses. Though bad as things have been for most, low-income and minority households have been hit the hardest on many counts. With their influence expected to grow, overcoming the housing problems of an increasingly younger, larger, and more diverse population will be crucial to securing the future of the nation’s housing markets and a lasting economic recovery.

Daniel McCue is a research analyst at the Joint Center for Housing Studies at Harvard.

Published by the National Housing Institute