Editor's note: This piece originally appeared in the August 2020 edition of MReport, now available.
How this sector of buyers will stabilize the purchase markets—once again.
First the bad news, which will hardly come as a surprise: The purchase market will be down in 2020. Uncertainty amidst the coronavirus is influencing decision- making for both buyers and sellers. With new construction projects at a standstill, inventory will remain tight and affordability may get even worse.
The silver lining is mortgage rates have never been lower than they are today. In April 2020, the average rate for a 30-year fixed mortgage fell to the lowest level ever recorded at 3.23%—just beating the previous record met in March earlier this year. While refinance volumes have already skyrocketed, however, surging unemployment and lower wages will slow the resale of existing homes for the next several months and maybe longer.
For the mortgage market, refinances will be the band-aid that will carry it for the next several months. But the industry needs a strong purchase market in order to be sustainable long term. So, is there a cavalry on its way?
Hispanic Homebuyers Are Driving Homeownership
Last year was a great year for Hispanics from an economic perspective. Latinos saw an increase in median household income and educational attainment, and they continued to have the highest labor force participation rate of the last two decades. These factors brought on an increase in the Hispanic homeownership rate for the fifth consecutive year and a net gain of 277,000 homeowners.
The National Association of Hispanic Real Estate Professionals (NAHREP) 2019 State of Hispanic Homeownership Report released last month documents these trends in detail. But 2019 wasn’t an anomaly. Hispanics have been driving growth in the purchase market for years.
Over the past decade, Hispanics have accounted for more than half of the homeownership growth
in the U.S., adding more than 1.9 million new homeowners. For the last five years, in fact, we’ve seen year-over-year growth in the Hispanic homeownership rate, as Latinos are forming new house- holds faster than any other demo- graphic. The math is simple—as more household formations form, more will become homeowners and raise the rate of homeowner- ship. Hispanics’ work ethic and affinity for homeownership is pretty remarkable.
Hispanics are also incredibly young and the fastest-growing population, accounting for more than half of U.S. population growth over the past 10 years. With a median age of 29.5, they are almost a decade younger than the general population and a full 15 years younger than their nonHispanic white counterparts. Considering that one in three Hispanics are under 18—upwards of 20 million people—there is no doubt that Hispanics will continue to fuel the market well into the future.
The growth in both new households and older households contributes substantially to the U.S. GDP. In 2018, the National Association of Home Builders estimated that housing made up 16.3% of the overall U.S. GDP, or nearly $3.4 trillion dollars. Over the last two decades, the Hispanic contribution to housing GDP significantly outpaced the overall market. As the overall housing market nearly doubled over that time period, Hispanics more than tripled their monetary contributions to housing GDP.
While the coronavirus may put a damper on the purchase market in 2020, the fundamentals that have driven Hispanics through a decade of homeownership gains will remain. Over the next 10 or 20 years, the name of the game
in the mortgage industry will be who can best capture this market share. Having a strategic plan will be vital.
Understanding the Hispanic Borrower
The next generation of homebuyers will look different than past generations, and not just for Latinos. Our market is changing, plain and simple. Housing costs are getting increasingly more expensive, particularly in urban centers. Traditional W2 wages earners are becoming less common, while self-employed individuals and gig-economy workers are becoming the norm. These shifts have been taking place slowly over time, yet mortgage underwriting remains stuck in models that are more reflective of past generations. What do lenders need know about Hispanic borrowers?
Hispanics utilize low-down payment products. According to our research, Hispanic homebuyers are twice as likely economy workers is notoriously challenging. To capture more Hispanic borrowers, it’s important that lenders develop underwriting models that support non- traditional workers.
Hispanics tend to have higher debt-to-income ratios and live in more expensive cities relative to their income. The median debt-to-income (DTI) ratio for Latino homebuyers in 2018 was 42%, while more than a third of Latinos had DTIs above 45%. This can be partly attributed to the concentration of Latinos living in high cost markets, where housing is more expensive.
Hispanics tend to have lower FICO scores—but they are increasing. In 2018, the median Latino FICO score was 684, up from 678 in 2016. While this is lower than the median credit score for the general population, which was 722 in 2018, remember, Hispanics are younger than the general U.S. population. When looking at the credit scores of young millennials overall (678) and older millennials overall (688), the median credit score of Hispanics is nearly identical.
Capturing Latino Marketshare
The 2019 State of Hispanic Homeownership Report set out to analyze who Hispanic homebuyers are, where they are, and where they are going. Given much of the future of housing demand will squarely rest within the Hispanic community, our entire industry would benefit from knowledge that will
allow even more Hispanics to participate in homeownership.
As an industry, we also have to be better at serving the Latino market in a way that works for them, and that means not solely relying on marketing materials translated into Spanish. While many Hispanic homebuyers today like to conduct business
in Spanish, 94.3% of Latinos under the age of 18 are U.S. born. That means the likelihood that they will not only be English proficient but English dominant is all but guaranteed.
In partnership with Freddie Mac, the NAHREP identified three strategies to reach the Hispanic consumer: a millennial approach, a geographic approach, and a human resources approach. Here’s a closer look at what these three strategies look like:
Convert mortgage-ready Hispanic millennials to homeowners. This strategy involves recruiting new Hispanic homeowners by focusing on the low hanging fruit: the millions of Hispanic millennials across the country who are already “mortgage-ready.” The report defines “mortgage-ready” as nonmortgage owners who were 37 and younger in 2018 and have credit characteristics that could qualify them for a mortgage. This generally means a FICO score over 620, a DTI ratio at or below 25%, no foreclosures or bankruptcies in the prior 84 months, and no severe delinquencies in the prior 12 months. In 2018, there were 4.9 million of these mortgage-ready Hispanic millennials across the U.S.
The report also features the top 20 markets with the most mortgage-ready young people, ranked by the availability of housing in each market. Notably, Texas topped the list with five cities among the top 20 markets. This is likely due to Texas’ more affordable cost of living, but more expensive cities such as Miami, Philadelphia, Los Angeles, and Chicago also made the cut.
Use Latinos’ domestic migration patterns to drive strategic planning. The second strategy is to identify where the future buyers are today, and possibly where they are headed. Between 2015 and 2018, Latinos have migrated from some ultra-high-cost states like California and New York, which lost 205,000 and 191,000 Latinos respectively. Texas, as noted above, has benefitted from an influx of Latinos with the highest number of domestic migrants at 102,000. What is worth noting, however, is that nontraditional Hispanic markets are booming as well. States like North Carolina (plus-34,000), Washington (plus- 42,000), and Georgia (plus-34,000) saw substantial growth to their Latino populations.
Recruit more culturally competent Latino professionals, including management positions. Finally, the most important strategy the mortgage industry can adopt is to focus on people resources. Taking on a mortgage is often the largest financial transaction a family will engage in during their lifetime. The process can be overwhelming, even for the most educated. There is also an experience barrier for first-time homebuyers that can be daunting. Even in the best cases, getting a mortgage is confusing. In the worst case, it deters a family from trying to qualify at all. When you build in language and cultural barriers, buying a home gets even more challenging.
In order to close this gap, the mortgage industry needs to recruit more Latinos as leaders and employees. Hispanics value personal relationships and make purchasing decisions based on trust. Mortgage companies looking to expand their Hispanic market share should commit to building culturally competent sales and operations teams that can develop trusted relationships with real estate agents and consumers. Personal relationships that build referrals are often forged in networking associations, like the NAHREP. In a survey of top-producing real estate agents in 2019, the NAHREP found
that Latino real estate agents predominantly serve Latino clientele. Over half of those surveyed reported that at least 60% of their clients are Latino, and more than a third reported at least 81% of their clients are Latino. That’s pretty remarkable, but not all that surprising.
Having a relationship with these agents will open the door to new market share.
A New Economic Reality
COVID-19 has created a new normal that will no doubt stunt the housing industry, at least in the short term. There is no magic bullet that is going to bring back the jobs lost over the last several months, and we have yet to see what implications this crisis will have on consumer credit, particularly for vulnerable communities. Like almost every other industry, 2020 is going to be a tough year for many.
Thankfully, unlike past recessions, the foundation of our housing market is stronger today that it’s ever been. It will bounce back strong, and most likely sooner rather than later. When the time comes, the fundamental trends that have driven Hispanics to lead the way in terms of homeownership growth will help lead the nation to recovery. So too will the lenders that focus on serving them well.