The number of mortgages originated to white borrowers dropped by the highest share, which is likely explained by white households being more likely to have an existing mortgage with an interest rate near 3 percent, meaning they would have less incentive to move.
For white borrowers with low incomes, the decline in originations was similar to the overall decrease, but for borrowers of color, the decline was more pronounced. Lending to borrowers with low incomes fell 4.5 percentage points more than overall lending for Black borrowers, 5.7 percentage points more for Hispanic borrowers, and 8.7 percentage points more for Asian borrowers. This comparison suggests that borrowers of color with low incomes could be more sensitive to rate changes because they don’t have the wealth to put together a larger down payment to mitigate the effects of rate increases.
The share of originations with high CLTV ratios fell the most for white borrowers. Although more research is needed, it is possible that a greater share of white borrowers—who, on average, have more wealth—were able to move to a lower CLTV category with a larger down payment, while many Black and Hispanic households dropped out of the homebuying market.
Lastly, the share of cash buyers and the share of investors increased in the market between 2021 and 2022. According to data from Realtor.com, the share of cash buyers increased from 32.4 percent to 36.1 percent during this period. The investor share, provided by CoreLogic, increased from 32.1 percent to 40.1 percent. These changes suggest that the rate increase strengthened the relative purchasing power of those with greater capital, as they can put down a larger down payment or pay fully in cash.
Several policies and programs can improve access to homeownership in a high-rate environment
Rising interest rates have suppressed the number of mortgages being originated through worsened affordability, but the effect is more acute for loans with characteristics on the margins of eligibility. Borrowers who have less money to put down and lower incomes also tend to represent the lower end of homeownership in the US.
Rate buydowns, which let borrowers secure lower interest rates by paying for “points” up front, could offer one solution to maintain accessible homeownership during high-rate periods. Buydowns can reduce DTI ratios and increase the long-term affordability of mortgage debt. Programs that offer rate buydowns through grants or forgivable loans may help borrowers that wouldn’t be able to afford homes on their own.
For borrowers who cannot afford buydowns, expanding providers of down payment assistance programs, including special purpose credit programs (SPCPs), may help. SPCPs are run by individual lenders to help historically disadvantaged groups access credit. Most SPCPs currently provide down payment and closing cost assistance, which can also help lower the DTI ratio and up-front costs of homebuying.
Without these policies or others that can lower barriers for borrowers with fewer resources, the disproportionate decline of homebuying in high-rate environments could exacerbate existing homeownership and wealth gaps.
