Urban Institute Research: Lower Income Borrowers Disparately Impacted by Higher Interest Rates

Data released by the Urban Institute highlights the impact of rising interest rates on lower income households. Median mortgage interest rates rose from a near-historic low of 3.00 percent in 2021 to 4.88 percent in 2022. Correlating with the sharp interest rates hikes, mortgage originations declined by 19.2 percent from 2021 to 2022.

Many lower income households were priced out of homeownership by the substantial change in rate increases. For example, borrowers earning less than 80 percent of the area median income saw a mortgage origination decrease of 22 percent. And while lower income households across the board experienced the decrease in mortgage originations, borrowers of color experienced disproportional impacts.

In comparison to the average lending rate, black borrowers experienced a 4.5 percent additional decrease, Hispanic borrowers dropped 5.7 percent, and Asian borrowers fell 8.7 percent. One of the likely driving factors in the difference stems from borrowers of color having accumulated less wealth than white borrowers and thereby unable to make larger downpayments to offset increased rates. Another contributing factor comes from the influx of cash buyers and investors who have greater access to capital and a resulting increase in purchasing power.

To avoid expanding this existing wealth and homeowner gaps with lower income borrowers, policies and programs to assist them are essential. A couple examples of policy ideas include rate buydown programs, which help borrowers secure lower interest rates, and expanding downpayment assistance programs through private and public channels.