Analysis: Home Mortgage Demand Declines in Rural America

Mortgage activity in rural America slowed dramatically last year, mirroring changes that occurred in the national housing market, according to an analysis of loan-guarantee data from the Department of Agriculture.

National vs. Rural Trends?

Numerous reports have documented the slowdown in homebuying and mortgage activity nationally in recent months. This market response is largely related to recent interest rate increases for 30-year fixed mortgages spurred by the Federal Reserve raising its benchmark rates. According to some estimates, the rate of mortgage applications nationally fell by half in 2022, and refinancings plummeted even more.

Are mortgage markets behaving similarly in rural America too? Housing finance dynamics in rural areas often mirror national trends – but with a few peculiarities. Due to underlying economic and demographic characteristics, rural finance dynamics sometimes lag behind suburban and urban trends and experience less volatility generally. It is important to note that every economic event is different, and most importantly, is felt differently in specific rural markets and communities.

But data from the Department of Agriculture (USDA) on its Guaranteed Home Loan product signals that rural homebuyers hit the brakes in 2022 as well.

Beginning in the late 1970s, USDA began providing a federal loan guarantee to borrowers seeking to purchase or rehabilitate a home in an eligible rural area (although USDA’s eligible areas often include some suburban and exurban communities). Applicants must have low or moderate incomes to qualify and there is no down payment requirement. In many respects, USDA’s loan guarantees are similar to Federal Housing Administration (FHA) loans in which the mortgage is originated by a private market lender and insured against default by the U.S. government.

Over 2 million homes have been financed with USDA loan guarantees since the product’s inception. The agency has guaranteed more than 100,000 mortgages each year since 2009. But not in 2022. In the last fiscal year, USDA loan guarantees plummeted by more than 40% from their 2021 level and dropped well below the 100,000-loan mark to guarantee 72,000 loans.

USDA Mortgage Guarantees Decline Nationwide

Between January 2022 and January 2023 all but four states and territories had declines of 50% or more in this loan product. Montana, Hawaii, Massachusetts, and Rhode Island all experienced more than an 80% decline in their USDA loan guarantees over this time.

Housing Prices May Be a Factor

While mortgage interest rates have increased at the greatest pace in decades, another factor that has steadily evolved over a longer period may also be contributing to reduced mortgage activity in rural areas. Nationally, the average price of a new single-family home in the United States has skyrocketed over the past few years. According to the most recent Census Bureau and HUD reporting, the median sales price for a new home sold in the United States was $467,700.Relatedly, the Federal Housing Finance Authority’s Housing Price Index reached its highest level since 1980 in the third quarter of 2022. The price of new homes financed with USDA’s home loan guarantee has witnessed similar increases and spikes in prices to those national trends. In the fiscal year 2022, the average loan amount (which this analysis uses as a proxy for housing prices) for a USDA-guaranteed loan was $185,241 – up 31% from the 2019 average loan amount with this product.

A Tale of Two Mortgage Products at USDA

The Department of Agriculture has been supporting housing opportunities in rural communities for over 70 years. While these efforts are sometimes not a high profile in the larger housing world or market, USDA has directly or indirectly supported the development and purchase of millions of homes for low- and moderate-income households across the rural landscape. Over the past few decades, the approach to rural housing provision at the department has changed and evolved, particularly in the realm of home purchase and finance. Beginning in the 1950s, USDA began offering home mortgages where the agency itself underwrote, financed, and serviced home mortgage loans – commonly known as “direct” loans. Starting in the early 1990s, loan guarantees became a larger component of the agency’s home-lending efforts and by the late 1990s loan guarantees largely eclipsed direct lending at the agency. While direct loans are still made by USDA, they comprised less than 1% of USDA-supported mortgages in 2022 – even with declines in the guaranteed product.

These two primary mortgage finance products offered by USDA have diverged in production as well as homebuyer dynamics and households served. Generally, the guaranteed product serves higher-priced home purchases and higher-income borrowers. All borrowers for the direct product must be low-income, while only 14% of guaranteed borrowers in December of 2022 met this low-income threshold, with 85% of guaranteed borrowers having moderate-level incomes. Similarly, the annual median borrower income for a USDA-guaranteed loan in 2021 was $61,105, compared to $39,497 for borrowers with a direct loan, according to a USDA report.

While the direct loan product did not see the same declines in originations as witnessed by the guaranteed product, the direct product operates under extremely limited supply dynamics and by most accounts is highly oversubscribed with large waiting lists.

Finally, it is important to note that both products are subject to non-market factors such as budgetary appropriations, federal staffing resources and operations, and private-public business relationships in the administration of these loans.

Where Are Rural Markets Headed?

Housing markets and dynamics are continually evolving and changing. The past few years have been particularly erratic, starting with record-low interest rates, a refinancing boom, continued home price spikes, and now a swing back to high interest rates. These decades-high interest rates are beginning to creep downwards, but there may be a lag in the rural guaranteed market as month-over-month declines in USDA-guaranteed loan activity continue to grow despite the interest rate trend. In January 2023, loan guarantees for this USDA product were down 60% from January 2022.

Rural mortgage markets have not always mirrored national trends. But the declines in USDA’s home mortgage guarantees clearly indicate that macroeconomic conditions of high interest rates and skyrocketing home prices are factors also impacting rural consumers seeking affordable housing finance options.

Lance George is the director of research and information at the Housing Assistance Council.