Housing Market Turning Negative for the Low-Income Population

The NY Times reports that there has been a sharp increase in the numbers of foreclosures on mortgages of minorities. This is a worrying sign in an already over-valued housing market because minorities have lower incomes than non-minorities. Therefore, any signs of a weak housing market will begin with lower-income Americans. For one, those living on low-incomes will end up paying higher interest rates and fees due to the higher risk of loaning money to those with lower earnings. The market for these people is called the subprime market because they have lower credit ratings and a higher risk of default. The article notes that subprime interest rates on mortgages are "three points higher than the prime rate, [which is] about 6.2 percent". Furthermore the rates of subprime (i.e., higher interest rate) loans for mortgages is higher for minority lenders than for white lenders:

About 30 percent of home purchase loans made to blacks from 1999 to 2004 and 20 percent of home loans made to Hispanics were subprime, compared with 10.4 percent of loans to Asian-Americans, only slightly higher than for white borrowers.

In 2004, the last year with data available, nearly 27 percent of loans taken out by minorities were subprime, up from 15 percent in 1999.

While these differences reflect largely differences in the relative income levels of minorities and whites, it reinforces the fact that that minority foreclosures could foresee broader problems in the housing market (and the economy as a whole), because foreclosures are linked with the income levels of homebuyers. A stagnating wage and decreases in savings (for instance, the first negative savings rate of the American economy since 1933) could cause the rise in foreclosures to spread upwards into the income distribution. Increases in the foreclosure rate will reduce the demand for housing, which in turn will decrease housing prices and could cause severe economy-wide problems. It is a harbinger of future recession.