Industry Insight: Expanding Homeownership to the African-American Market
April 27, 2017
We're focusing on the African-American homebuying market in this Industry Insight, the second of a four-part series on expanding homeownership to particular demographic groups.
The black population in the U.S. faces unique challenges to achieving homeownership. Understanding those challenges can help you reach this group of buyers.
In 2004, homeownership among African-Americans reached a peak of 49 percent of households. A decade later, the homeownership rate had dropped to 43 percent.
"The black homeownership rate has declined steadily since 2004," says Ron Cooper, 2016 President of the National Association of Real Estate Brokers (NAREB). "We're raising the alert that we need to do something to increase homeownership."
Unless significant changes occur, current predictions suggest that black homeownership will continue trending downward to 41 percent of black households in 2020, and 40 percent in 2030. Cooper believes that the reversal of this trend is essential for African-American communities.
"Homeownership is the first and greatest creator of net worth and generational wealth," says Mark Alston, NAREB's Public Affairs Chair. "Without that, you usually have a lower starting point, and you can see that in the degradation of our communities."
What factors are perpetuating the downward trend? NAREB's 2016 State of Housing in Black America (SHIBA) Report identified several contributing factors:
Loan pricing – The study identifies loan-level price adjustments (LLPA) as one policy that has had a deleterious impact on black communities. LLPA is based on criteria such as loan-to-value (LTV) ratio, credit score and cash-out refinancing – all of which disproportionately affect loans to African-Americans borrowers as a whole.
Housing shortage – NAREB has asked the GSEs to break non-performing loans into smaller groups so that non-profits and cities can invest in these properties and restore them to the market as affordable homeownership options. Currently, large groups of non-performing properties are sold to hedge funds. "These private entities are turning a lot of these properties into rentals," Cooper explains, "which we feel in the inner city is relegating our people to renting."
- Lender presence – The study also identified a loss of black-owned banks, which were hardest hit by the Great Recession. As the SHIBA report notes, between 2008 and 2012, the FDIC closed, forced sales or liquidated 466 commercial banks, many of which were black-owned. By August 2014, there were only 21 black-owned banks left in the U.S. With bank closings in communities of color have gone a significant number of the loan officers, originators and underwriters who were familiar with those communities. "Experienced loan originators are needed," Cooper says, "but experienced LOs keep moving out of this space."
NAREB fully supports responsible lending to increase homeownership sustainability, "but we also recognize that inner-city communities and lower-income people of all races are used to paying a higher percentage of their income towards housing," Alston says. "That should be taken into account by the census track."
To reverse the current trend, NAREB has set an aggressive goal of two million new black homeowners in the next five years. Community lenders can play a critical role in achieving this goal. One of the most effective actions that community lenders can take, both Alston and Cooper agree, is to recruit and encourage loan officers to work in African-American communities.
Cooper says, "We need help and partnership with our lenders, particularly lenders that focus on community lending, with regard to pricing disparities." He believes that current loan officer compensation and promotion models could be amended to be based "not just on production but on production given the business available. There is less business to be had in black communities."
Community involvement and educational outreach may be the most important activities that community lenders can undertake to help expand homeownership in black communities.
"People are afraid," Cooper says. "They think they need 20 percent down. They think if they lose their job, they'll lose their house, that the bankers have tricked them."
He adds, "We need to change the narrative to homeownership being part of the American dream." To help bring about change, he suggests participating real estate boards, faith-based community organizations, and other community groups.
For additional insight into how to expand homeownership to the African-American market, check out these related resources: