Board of Governors of the Federal Reserve System

July 08, 2022

Declining Affordability and Home Purchase Borrowing by Lower Income Households

Daniel Ringo

Affordability pressures

The COVID-19 era has experienced an unprecedented surge in home values. In the two years between March of 2020 and March of 2022, the S&P/Case Shiller U.S. National Home Price Index grew approximately 37 percent in nominal terms.¹ For much of 2020 and 2021, the purchasing power of home buyers was buoyed by record-low mortgage interest rates, offsetting the higher prices. In early 2022, however, mortgage rates rose. Consequently, the required average monthly payment associated with newly originated purchase mortgages shot up to new heights, approximately 50 percent above their pre-pandemic levels (see Figure 1).

Figure 1. Average Mortgage Interest Rates and Monthly Payments

Under these higher required payments, many potential home buyers would struggle to afford a home or qualify for a mortgage. Lenders (often following the guidelines of the government sponsored enterprises Fannie Mae and Freddie Mac, or those of the Federal Housing Administration) impose maximums on the ratio of a borrower's debt service payments to their income (DTI ratio).² As required payments rise, mortgages will increasingly be available only to households with higher incomes.

Home purchase lending to lower income borrowers

Data recently collected under the Home Mortgage Disclosure Act (HMDA) reveal that home purchase lending to lower income borrowers has fallen dramatically in 2022. The Census Bureau estimates that the median household income in 2020 was about $68 thousand (Shrider et al, 2021). The solid red line in Figure 2 plots the fraction of originated home purchase mortgages to borrowers with an income below this median by the week of loan application.³

Figure 2. Fraction of Borrowers with Below-Average Incomes

A drop in the fraction of borrowers with a below-average income in 2022, coinciding with the rise in mortgage rates, is quite evident from the figure. Borrowers earning less than $68 thousand annually accounted for over 35 percent of home purchase loans prior to the pandemic. By March of 2022, they accounted for only about 20 percent of such loans.

Timelier data from mortgage rate locks suggest the decline in lending to below-average income borrowers continued through at least May of 2022. The rate locks data come from Optimal Blue and provide detailed underwriting information on mortgage borrowers whose rate is locked through the Optimal Blue platform.⁴ The locks data do not include borrower income, as the HMDA data do, but include required monthly principal and interest payments and the DTI ratio. The probability a borrower is of below-average income was calculated for each combination of monthly payments and DTI ratio using HMDA data from 2021, and the estimates applied to the payments and DTI ratio data from Optimal Blue to produce a weekly estimate of the fraction of home purchase rate locks going to below-average income borrowers.

The estimated fraction of below-average income borrowers from this procedure are shown in Figure 2 alongside the HMDA data, by week of rate lock. As can be seen, the estimates provide a close approximation to the true HMDA data over the sample period in which they overlap. The estimates suggest a further decline in the fraction of home purchase mortgages going to lower-income households, from about 20 percent in mid-March to 17 percent in mid-May of 2022.

Implications for home buying demand

Housing market data available as of June 2022 suggest the demand for homes continues to be very high, as prices rise rapidly and homes put on the market sell quickly. However, some indicators are recently showing signs of cooling. For example, the National Association of Realtors reports that the months of supply of existing homes for sale ticked up in April (albeit only to 2.2 months, a level that is extremely low by historical standards). As more and more households get priced out of the market, the cooling trend may become more pronounced.

Works Cited

Shrider, Emily A., Melissa Kollar, Frances Chen, and Jessica Semega, U.S. Census Bureau, Current Population Reports, P60-273, Income and Poverty in the United States: 2020, U.S. Government Publishing Office, Washington, DC, September 2021