Economic uncertainty hits… home ownership | Federal Reserve Bank of Minneapolis
Buy a home, build equity, and watch your wealth grow. This long-standing formula is how middle-class Americans have generated wealth for decades. When families are able to sell their homes voluntarily, black and white households gain financially. But new research from Amir Kermani and Francis Wong presented at the Institute’s research conference in the fall highlights that differences in the likelihood of adverse economic events make it harder on average for black homeowners than homeowners. whites to create real estate wealth.
To illustrate how black and white homeowners fared in the housing market, we look at annualized returns for families who bought homes in the same year and in the same county.
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Black owners’ annual rate of return on distressed sales. Black homeowners who are forced into a foreclosure or short sale (distressed sale) tend to lose more money than white homeowners.
White owners’ annual rate of return on distressed sales.
White homeowners are almost twice as likely as black homeowners to sell their home under normal and approximately
1.5 times more likely to profit.
Income instability changes the equation
Home ownership is more risky for black families. They benefit from normal sales but are more economically vulnerable and therefore more likely to lose their homes. Black homeownership is more fragile, in part because black workers are more likely to be laid off and fall behind on mortgages.
When mortgage costs rise, such as when a home is revalued for tax purposes, mortgage delinquency rates also rise. But the share of black households falling behind on their mortgages is increasing more than twice as much as for white households.
Normal fluctuations in mortgage costs therefore push more black households into distressed sales and drive down yields on black homes.
The equation is unequal
Poor economic conditions also weigh more heavily on black households than on white households, which affects housing returns. During the Great Recession, for example, the racial gap in foreclosures widened, causing the gap in annualized housing returns to triple between black and white households.
Conditions that make income more secure (like a strong economy) or keep people home even when they’re in trouble (like loan modifications) reduce the number of distressed sales and reduce racial gaps in returns for accommodations.
As the economy recovered from the Great Recession, for example, racial differences in housing returns narrowed. For homes purchased in 2015 (and sold by 2019), yields for black households were indistinguishable from yields for white families in the same county.
When a homeowner is behind on their home payments, mortgage services – the companies that handle the payments – may choose to enter or negotiate a short sale (referred to above as distressed sales), which usually results in significant losses. But repairers can also change the terms of a loan temporarily or permanently to help homeowners stay in their homes. Some public policies, like the CARES Act, encourage and subsidize these mortgage modifications.
The changes go a long way to avoiding distressed sales and increasing home returns. Homeowners who have a mortgage agent who frequently modifies loans for other borrowers are themselves more likely to be offered a loan modification than similar homeowners with another agent. They then see both their likelihood of a distressed sale and their home losses cut in half.