A very significant change in homebuyer demographics is expected during the next 20 years. Will it also have a significant effect on home values? The January 2021 Urban Institute report (The Future of Headship and Homeownership) finds:
“Net growth in the number of homeowners from 2020 to 2040 will be entirely among people of color, especially Hispanic homeowners. Between 2020 and 2040, there will be 6.9 million net new homeowner households, a 9 percent increase. Hispanic homeowners will grow by 4.8 million, homeowners of other races (mostly Asian homeowners) will grow by 2.7 million, and Black homeowners will grow by 1.2 million. The total number of white homeowners will decline by 1.8 million.”
If this proves to be true, it will require changes for the entire residential real estate industry. Just to begin with, what implications will it have for future home values? Many studies conducted over the past several decades continue to show that neighborhood racial composition still drives unequal home values. Many laws have been in effect for over 50 years that prohibit real estate professionals from explicitly using race when evaluating a property’s value. But change has been very slow.
Appraisers continued to value homes in white neighborhoods as worth more than similar homes in Black and Latino communities. Research shows that since 1980, in similar social-economic neighborhoods, dominantly white home values have appreciated an average of $200,000 more than in neighborhoods of color. If this continues, home value appreciation will be suppressed as white homeownership declines and minority ownership increases.
One fact supporting the probability that Hispanic homeownership will increase is that the Department of Housing and Urban Development (HUD) announced in January that it is extending eligibility for FHA mortgages to immigrants under the Deferred Action for Childhood Arrivals (DACA) program. This means that “Dreamers” who are legally permitted to work in the U.S., are now eligible to apply for FHA-backed mortgages. Dreamers make up the age demographic most active in home purchases. DACA participants include undocumented immigrants that arrived in the U.S. before their 16th birthday and were less than 31 years old when the program was established on June 15, 2012. In addition to 4.8 million new homeowners, the number of Hispanic rental households is expected to increase by 3.8 million.
More changes will be needed in the real estate lending industry. According to a MarketWatch analysis of Home Mortgage Disclosure Act data, African-Americans make up 13% of the country’s population, but they only received 6% of the mortgages that were originated in 2016. Furthermore, as a result of the Great Depression, lending requirements became much more stringent and that disproportionately causes even fewer black and Latino mortgage applicants to be approved. Less access to loans is likely to further obstruct price increases.
Homeownership trends, demographics, and lending policies are at a crossroads. Without meaningful change, the long steep climb in home value appreciation can be expected to slow significantly. As the largest asset owned by the vast majority of Americans, this endangers wealth accumulation.
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