Editors Note: This article was originally featured in the October issue of DS News, available now.
Recent evidence suggests that while the housing market has largely recovered from the 2008 mortgage crisis, nearly a decade later, a new problem may be emerging: a lopsided market.
Because housing prices have recovered at a faster pace than wages, low- to moderate-income earners have disproportionately less buying power in the housing market than high-income buyers and investors. Simply put, the average American is struggling to overcome the very real obstacle of providing the necessary down payment for a home.
Consider that millennials—the largest share of prospective homebuyers today—continue to struggle to save money; most have less than $1,000 in savings for a down payment, according to industry surveys.
Buyers’ Biggest Hurdle
While investors and high-income earners have the capital to easily produce the traditional 20 percent down payments on homes, first-time buyers and low- to middle-class earners simply don’t have the money.
The median price for a home in the United States in April was $246,100, according to the National Association of Realtors. Using traditional loan options, that requires a down payment of around $49,000. With median household incomes hovering around $56,000, according to the most recent government reports, you can start to see the struggle.
Even loan programs that allow for lower down payments, like FHA or VA loans, would require down payments of around $9,000—nine times what current millennials have saved. Never mind closing costs, which add thousands of additional dollars to the amount needed to purchase a home.
The inability to produce the upfront money required to enter the housing market is no indicator of the borrower’s ability to afford the mortgage itself. Using the same median housing price at current rates, a homeowner could expect an escrow mortgage payment of around $1,700 when using a low-down payment loan like FHA. That’s only slightly higher the national average rent payment of $1,600.
One study goes further—suggesting that in 42 states, a mortgage is actually less than a monthly rent payment, on average. On a month-to-month basis, it’s clear: Homeownership is affordable, and upfront costs clearly limit its expansion.
Ideals of the American Dream of homeownership aside, owner-occupied homes tend to be strong indicators of the strength of a neighborhood. Owners of a home typically become more invested in the community and its future.
A University of Nebraska study, in fact, points to homeownership rates as having a direct effect on lower crime rates in a community.
The logic is sound: When people own a home, they naturally become more invested—figuratively and literally—in the home itself and in the neighborhood around it. For many, a home is the biggest investment they’ll ever make. It benefits them to protect that investment through upkeep and efforts to ensure the well-being of the surrounding neighborhood.
Problems With Programs
Understanding this, it becomes clear why nonprofits and community initiatives place a high value on programs that empower homeownership. Banks, nonprofits, and cities across the nation are introducing programs that attempt to make homeownership more accessible. A few recent examples include access to financial literacy and debt-counseling programs to assist with down payments—either through grants or low-interest loans.
Many people, however, aren’t aware of these programs or their benefits. This is evidenced, perhaps, by a Fannie Mae survey of millennial renters that found half cited their ability to afford a down payment or closing costs as their biggest obstacle to purchasing a home—more than any other obstacle cited, including credit history and the ability to afford monthly payments.
Even if people were aware of down payment assistance programs, such programs can be restrictive and hard to understand. Qualifications for assistance often are limited to those with very low incomes, to properties within a city’s urban core, or to first-time homebuyers only.
Turning Them Into Tools
A down-payment assistance program can be a valuable way both to attract new customers and to fulfill community investment goals. It eliminates the most frequently cited barrier to homeownership, opening up an entirely new demographic of future borrowers.
For down-payment assistance programs to truly be effective, however, they have to be widely available, have few restrictions, and be well promoted so that those who can most benefit from them know about them. Otherwise, homes will continue to be bought primarily by investors and high-earners, driving the market further into its current lopsided state.
Addressing this imbalance is not only possible, it’s necessary. Here are four simple tips to help lenders level the field:
Make your assistance program searchable. The ability to search and compare different programs makes it easier on prospective buyers and the professionals helping them. Being able to see what program someone qualifies for is invaluable and can allow lenders to pair a borrower with the perfect program, or even multiple programs. For example, you could match a buyer with an available grant, plus your bank’s own program, plus something else. Educate your staff and don’t be afraid to tell them to search outside your normal partnerships.
Don’t go it alone. Form new partnerships and forge relationships with organizations with similar goals, such as nonprofits that exist to help people realize their dreams of homeownership or others that work with low-income families and communities. These organizations can become valuable advocates for your down-payment programs by spreading the message to the right audience. Work with Realtors, too, who cover the neighborhoods and communities where you are lending. Form community advisory groups to ensure that you understand the needs of the community, update them on progress, and work to make sure their needs are met.
Take advantage of government programs. Fannie and Freddie, the FHA, VA, and even state bond programs are all valuable resources. Often, they can supplement your organization’s down-payment assistance or guarantee loans with lower down-payment needs than traditional mortgages.
Empower your buyers. The housing crisis didn’t just impact lending institutions. It left consumers feeling more nervous about homeownership and perhaps intimidated by stricter requirements for loans and more stringent application protocols. Help them understand the process and where they fit in. Educate them not just on what they can buy but also—and more importantly—on what they can afford. Reach out to potential customers through community groups and by hosting financial empowerment classes at community centers or local businesses. Consider topics such as what a credit score means and how to repair it, the appraisal process, how to refinance or lower current payments, and a walk-through of the home-buying process.
The simple truth is that the myth of disinterested millennials is simply that: a myth. More than three-quarters of millennials believe owning a home is a more financially sensible option than renting.
The desire is there. As lenders, we need only to respond.