An analysis of Philly deeds reflects the challenges facing low- and moderate-income home buyers

The share of lower-priced homes bought with mortgages has dropped significantly over the last decade at the same time that sale prices have doubled in Philadelphia, according to an analysis of deed transactions released by the Pew Charitable Trusts this month.

“Combined, obviously, they reflect greater challenges for low- and moderate-income households who want to be homeowners,” said Larry Eichel, a senior adviser to the Philadelphia research and policy initiative at the Pew Charitable Trusts.

Scholars and advocates predict the economic downturn caused by the coronavirus pandemic could keep lower-income households, the ones likely to take out lower-priced mortgages, from being able to buy homes. That would extend the downward trend Pew researchers saw between 2008 and 2018.

Historically, Philadelphia has prided itself on being a place where residents with low and moderate incomes can afford to buy homes. About 30% of home-owning households in Philadelphia earned less than $35,000 in 2018, according to the Pew Charitable Trusts.

“This data raises the question of how that’s going to be able to continue,” Eichel said.

From 2008 to 2018, the share of mortgage-backed home sales in the lower-priced half of Philadelphia’s residential market dropped from 46% to 35%, according to the Pew Charitable Trusts. (Researchers disregarded government and sheriff’s sales, sales of $10 or less, government sales, and sales of bundles of properties.)

Nationally, a lack of financing for homes under $70,000 is an obstacle for aspiring homeowners with lower incomes. A bill that passed the U.S. House and is before a Senate committee would require a review of the Federal Housing Administration’s mortgage insurance policies to study their effects on small-dollar mortgage lending. Small-dollar mortgages have significantly higher denial rates, even when accounting for credit scores, the Urban Institute found in a 2018 study.

A combination of factors helps explain the drop in lower-priced mortgage sales in Philadelphia.

“We’re becoming a city where home ownership is increasingly out of reach for lower-income families,” said Michael Froehlich, managing attorney in the home ownership and consumer rights unit at Community Legal Services.

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After the Great Recession, standards to qualify for mortgages became more strict. Minimum credit scores increased and acceptable levels of debt decreased.

“So it became more difficult for working-class and middle-class people to qualify for a mortgage,” Froehlich said.

Philadelphia’s mortgage approval rate is below national averages for both conventional and Federal Housing Administration mortgages. Mortgage approval rates tend to be lower in areas that are majority people of color than in areas with mostly white residents, even when controlling for income. Neighborhoods with more moderately priced homes are generally ones with larger numbers of people of color. Obtaining a small-dollar mortgage generally is more difficult than a larger-dollar one.

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Adding to the challenges lower-income households face, home prices in Philadelphia have been increasing. From 2008 to 2018, the median sales price in the city doubled from almost $80,000 to $160,000. The number of homes that sold for less than $100,000 dropped by 43%. Meanwhile, the city had five times as many homes that sold for $500,000 or more in 2018 than it did 10 years earlier.

Last year, the city expanded its first-time home buyer program to try to make home ownership more affordable for residents. The Philly First Home program gives Philadelphians up to $10,000 for down payments, closing costs, and mortgages. The city considered cutting assistance for first-time home buyers and funds for other housing programs in light of a $749 million revenue shortfall created by the pandemic, but City Council restored millions of dollars in housing funding to the revised budget.

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That funding includes money for the production of low-income housing. Housing inventory is low across the market, including lower-priced homes. The significant amount of new construction in the city has meant the razing of older, lower-priced homes that often are replaced with more expensive ones that are out of reach for low-income residents.

Steve Gardner, president and executive director of Philadelphia-based Clarifi, which teaches financial literacy and helps people prepare for home ownership in Pennsylvania, New Jersey, and Delaware, said he doesn’t see the downward trend in the number of lower-priced mortgages reversing “in the foreseeable future,” especially given the pandemic. He expects wealth gaps to continue to increase, which means larger gaps in home ownership.

“This pandemic has really highlighted some of the racial wealth inequities and racial income gaps,” Gardner said.

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Lack of access to mortgages has contributed to declines in Black and Hispanic home ownership, according to a March report by the Reinvestment Fund. Decades of redlining — the practice of subjecting Black people to discriminatory mortgage lending and keeping them out of certain neighborhoods — and city disinvestment, along with increasing home prices reflect the neighborhoods where cash buyers tend to operate.

Investors have been buying lower-priced homes with cash at lower than market value and flipping or renting them.

“Especially in rapidly gentrifying neighborhoods, we have a large percentage of homes being sold to all-cash buyers, which will only hasten the gentrification of those neighborhoods and make it more difficult for first-time home buyers and home buyers of color to purchase in those neighborhoods,” said Froehlich of Community Legal Services.

He said that when mortgage lenders deny loans to aspiring homeowners, “the dream of home ownership dies really hard.” The denial drives some people to enter into “predatory” rent-to-own agreements, in which they make payments but never end up owning the home, Froehlich said.

“It turns out they’re set up to fail,” he said.