Federal Reserve interest rate increases hurt Black homebuyers in more ways than one

Interest rate increases disproportionately impact Black homebuyers and owners in ways far beyond the cost of borrowing.

The Federal Reserve has increased interest rates six times since March to cool an overheating economy beset by inflation. Policymakers have acknowledged that the increases will cause pain — and it already has.

The Fed policies increase “the cost of a home loan mainly through increasing the monthly payment that a family will have to pay, which is just exacerbating an affordability crisis that we’ve already had,” Kyle Moore, an economist with the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy, told theGrio.

The interest rate increases have a cascading effect that ripples through all aspects of homeownership.

For example, higher rates drive buyers out of the market, depriving them of the advantages of owning property and building equity and long-term wealth. Refinancing for home improvements and taking out equity to finance education or consolidate debt becomes more costly.

Additionally, those increased interest rates could cost Black homeowners, with little disposable income, far more money over the long term if they have to borrow to stay in their homes.

The average 30-year fixed mortgage, the most popular term, increased to 7.32% in mid-November, up from 5.84% at the end of July. That means a buyer who purchased a $428,700 home — the median price in the United States — saw their principal and interest payment rise by $377 a month to $2,650 from $2,273.

The increase has a direct impact on a continuing affordability crisis. 

“Present home prices are coming down some, but still not to a level where it would be feasible for many families who don’t have a store of wealth to be able to afford the down payment on a new home,” Moore said. “So now we’re facing it from both ends. We’re facing a mortgage affordability crisis and down payment issues, making it doubly difficult to become a homeowner.”

Part of that difficulty rests in the inability to get a mortgage to begin with. Lenders reject mortgage applications from about twice the number of prospective Black buyers than whites, according to an analysis by Lending Tree. 

But then getting a mortgage, on average, costs Black people more and is exasperated by interest rates that keep creeping up. Black homeowners pay, on average, 33 basis points more for a mortgage than white homeowners, according to a study by the MIT Golub Center for Finance and Policy.

Black homeowners, according to the MIT study, pay an additional $13,464 over the life of a loan because they pay higher mortgage rates. The study said that those higher interest rates cost Black homeowners more than $67,000 when considering investing the excess mortgage payments over a 25-year term. 

That means equitable mortgage rates alone could nearly cut in half a racial wealth gap in which the average white family’s net worth of $171,000 outpaces the average Black family by a factor of 10.

Moreover, homes in Black neighborhoods are worth 23% less than those in comparable white neighborhoods, resulting in $156 billion in losses, according to the Brookings Institution. Home equity remains the number one way American families build wealth, and the combination of higher interest rates and devalued properties leaves Black homeowners at a disadvantage.

“We don’t really have pensions anymore,” Moore said. “401k’s are so risky. The stock market is risky. Homeownership has been that consistent, reliable method of building wealth.”

But fewer Black people today (43.4%) own their homes than a decade ago (44.2% in 2010), according to the Department of Housing and Urban Development. 

“So comparatively, few Black families own their homes, so they don’t have that option to access that store of wealth to do all the things that wealth allows you to do,” Moore said.

There are also two areas related to interest rate increases that don’t get much attention: How the increase in property values leads to higher taxes and how refinancing rates have also climbed.

The average home price rose 13.5% year-over-year in August 2022 vs. 2021, according to a report by CNBC. But raising value means higher taxes since cities and counties reassess tax rates based on new valuations. Property taxes rose 5.4% between 2019 and 2020 and another 1.6% in 2021, according to the Washington Post. 

Higher taxes and mortgage rates can put a home out of reach. And for those who have a home, the higher rates can make it harder to refinance. A 30-year FHA refinance rate moved to 7.24% in November, up from 5.79% in late July. 

But Miesha Williams, an associate professor of economics at Spelman College, an HBCU, said that refinancing at a higher rate over a longer period might be attractive to some low-income homeowners struggling to keep up with their payments. 

“That lower payment, even at a higher interest rate, is attractive if you weigh the marginal cost and the marginal benefit,” she said. “If I’m a homebuyer and my taxes go up by maybe $500 a month, it’s increased my mortgage, and I need to still be able to make those payments.” 

While it may be counterintuitive to pay far more in interest over the long term to save a few dollars in the short term, when it comes to staying in your home, it’s an easy choice.

“I need those payments to be lower now. We’ll figure out the rest later,” she said.

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