Overall denial rates for conventional mortgages have fallen for almost a decade, a sign of progress that nevertheless conceals a stark divide in the housing market: Black applicants for conventional mortgages are denied at more than twice the rate of white applicants.
Editor’s Note: April 11, 2018 marks the 50th anniversary of President Lyndon B. Johnson’s signing of the landmark Fair Housing Act, which now prohibits discrimination in housing on the basis of race, color, national origin, religion, sex, familial status and/or disability. The housing market has changed a great deal since then, as have social and cultural attitudes toward race and discrimination — but while a lot has improved, there is still much progress to be made toward ensuring true equality in housing. Zillow Research will be examining this topic throughout April in honor of Fair Housing Month, and we invite you to read all of our related research and analysis here.
Overall denial rates for conventional mortgages have fallen for almost a decade, a sign of progress that nevertheless conceals a stark divide in the housing market: Black applicants for a conventional mortgage are denied at more than twice the rate as white applicants.
And that divide has widened somewhat over the past two decades.
Nationwide, the share of applicants denied for a conventional mortgage loan fell to 9.8 percent in 2016, according to a Zillow analysis of loan data from the federal Home Mortgage Disclosure Act (HMDA). Since peaking in 2007 on the eve of the housing bust, the overall denial rate has fallen in each of the past nine years compared to the year prior and currently stands at its lowest level since at least 1994.[1]
But despite that progress, white and Asian borrowers remain much less likely to be denied a conventional loan than their black or Hispanic peers. In 2016, 20.9 percent of black borrowers and 15.5 percent of Hispanic borrowers were turned down for a conventional loan; at the same time, just 8.1 percent of white and 10.4 percent of Asian applicants were denied a conventional loan.
Those looking for a silver lining won’t have to go far to find one: Conventional loan denial rates for black and Hispanic borrowers have fallen much farther over the past decade than for whites and Asians. In 2007, 34.3 percent of black applicants and 30 percent of Hispanic applicants were denied for mortgages. White and Asian borrowers were denied 12.7 percent and 16.2 percent of the time in 2007, respectively. The percentage point gap between black and white borrowers in 2007 was 21.6 points. Today, that gap is just 12.8 points wide.
But a deeper look reveals that silver lining may have some tarnish on it. That black denial rates are coming down is unalloyed good news, but the fact remains they have much farther to fall than white denial rates. And while blacks in the mid-1990s were roughly twice as likely to be denied as whites, that gap has since widened, not narrowed: In 2016, blacks were 2.6 times as likely to be denied a conventional mortgage as whites.
The picture is similar for loans backed by the Federal Housing Administration (FHA), which tends to focus its lending programs on borrowers with lower income and/or lower credit scores – FHA denial rates overall are down, but remain much higher for borrowers of color than for white borrowers. In 2016, 18.6 percent, 15.3 percent and 14.8 percent of black, Asian and Hispanic borrowers, respectively, were denied for an FHA-backed loan. At the same time, just 11 percent of white FHA applicants were denied.
Across the board, borrowers in suburban areas had the best chances of being approved for a mortgage. Approximately 8.4 percent of suburban homebuyers were denied for a conventional loan in 2016, while 10 percent of urban borrowers and 11.5 percent of rural borrowers were turned down, a trend that holds for all racial and ethnic groups.
Important note: There’s a lot that goes into getting approved for a loan. Rather than overt racism or discrimination leading to more denials, today’s outcomes can be explained – at least in part – by differences in income, debt levels, credit scores and savings between racial groups. But when it comes to outcomes in the real world, it’s impossible to completely disentangle the effects of income from the effects of race and the impact of historically discriminatory policies like redlining on the ability of people of color to buy homes and accumulate wealth today. These disparities are evident in homeownership, even for those people of color successful in qualifying for a home and finding an affordable one to buy.
The gap between black and white homeownership rates was slightly wider in 2016 than it was in 1900. Black homebuyers had the least home purchasing power last year of any group analyzed – they could afford 55 percent of available homes, while white homebuyers could buy about 78 percent of listed homes. And while coming up with a down payment is the biggest hurdle to homeownership for all potential buyers, black Americans were more likely than those of other races to say qualifying for a mortgage was a barrier, according to a recent Zillow survey.
And for those unable to achieve homeownership, the implications run deep: Homeownership helps significantly in building wealth, and more than half the overall wealth of American households is held in their primary residence. Black and Hispanic homeowners, in particular, rely on their homes for wealth more than white homeowners do. Greater wealth eases the path to homeownership, and the relationship becomes self-reinforcing: Homeowners have greater access to financial wealth that, in turn, makes it easier to become and remain homeowners.
Securing a loan is the first and most crucial step in the home buying process – unless a buyer can pay in cash, they realistically can’t determine an affordable budget and begin their home search without loan approval. In effect, many would-be homeowners – a higher share of them non-white – are prevented from taking advantage of the wealth-generating machine that is homeownership before they even have a chance to start.
[1] The total number of applications plummeted after 2007 before steadily rising during the ensuing housing recovery, but remain below mid-1990s levels.
