Black homeownership declines

Abstract

This paper provides an overview of research surrounding the decades long decline in Black homeownership, the causes, and the implications of this decline, despite the recent efforts by the lending community and government programs. The research will identify government policies that were in place in the early 1960’s which started the initial segregation of neighborhoods, and the implications that exist to this day from those policies. The research will then identify the policy changes over the past 60 years and highlight the unintended results, while also identifying why the polices have fallen short and have not only have not helped the Black borrower, and instead show a resurgence of discrimination within the lending community.

Introduction

When James Truslow Adams first coined the term the American Dream he said, “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement regardless of social class or circumstance at birth” (2022). While Homeownership was not encapsulated in Adams’ original dream, it is often referred to as one of the tenants in modern day America, as the importance is directly linked to amassing wealth and improving one’s economic status. “The gap in homeownership rate between black and white families in the US is bigger today than it was when it was legal to refuse to sell someone a home because of the color of their skin” (Mccargo et al., 2020). It is for this reason, that understanding the decline in Black homeownership is paramount. Absent access to purchase homes, their communities will further decline keeping them in the same economic stale mate, they currently sit.

Literature Review

Lending Policies and the impact

As early as the 1930’s, the government began to systematically segregate neighborhoods based on demographics alone. This practice was called “redlining”. Sociologist John McKnight coined the term, and it refers to the redlines they drew on a map to distinguish between neighborhoods they would or would not invest based simply on race. The consequence of these practices was numerous. Redlined neighborhoods were not only heavily segregated, but banks and municipalities would redirect city funds and parks to those white neighborhoods, and concrete structures and warehouses to those black neighborhoods, resulting in massive temperature issues for the poorer neighborhoods. Another result of redlining, which can be felt today, is the within property valuation. The housing in those neighborhoods is worth less than half of those homes in non-redlined neighborhoods, according to Adam Hayes of Investopedia.

Lenders were also involved in these redlining practices and would make obtaining loans very difficult for Black homeowners. Studies show that lenders would make loans to low-income white borrowers but not upper income Black borrowers. When Black borrowers did attempt to obtain loans from banks, they were often declined and so these borrowers were subject to unfair lending practices and given loans that were more expensive and with terms that were unrealistic to pay back.

“In 1960 the gap between Black and White Homeownership was 27 points” (Connley, 2021). Finally in 1968, we saw the creation of the Fair Housing Act. This Act prohibited discrimination concerning the sale, rental, and financing of housing based on race, religion, or national origin. Following this Act, “the rate of homeownership for black households rose from 41.6% in 1970” (Mccargo et al., 2020). A few years later, another significant Act was enacted, placing additional demands on banks and thrifts to increase their investments within urban areas with a focus on the low-to-moderate income areas where they are chartered. This was called the Community Reinvestment Act of 1977, and this Act forces these banks and thrifts to actively remain engaged in credit and deposit services to the low-to-moderate borrowers to remain in good standing with the Federal Reserve. Finally, in 2007 Black homeownership hit a peak of 46.5%. This progression was great until 2007 and the economic crisis, which resulted in millions of foreclosures and job losses for the nation.

Contemporary housing issues

More contemporary issues are now arising for Black homeowners. Prior to the pandemic, many Americans made a shift towards more urban areas, causing a new wave of issues for low-to-moderate income families within these once affordable areas. This is called Gentrification. “Gentrification is the transformation of a city neighborhood from low value to high value real estate. This process is often marked by inflated home prices and displacement of a neighborhood’s previous residents. (Picardo, 2020). As these neighborhoods improve, taxes rise as well as other tangibles within the area, pushing those who can no longer afford to pay these taxes to move elsewhere.

Importance of amassing wealth

The most important reason for these Black families to own a home is to begin to amass wealth. The Federal government estimates that the average homeowner in 2016 had a household wealth of $231,400, compared to the average renter having a household wealth of just $5200. If these Black families can buy the home, they then have an asset which helps not only themselves but allows them to pass down to other generations. As seen above, there is significant gap in wealth between the homeowner and the renter, much of this is attributed to these borrowers learning how to save money for the down payment and then continuing to save and use other investment tools to continue to amass wealth, plus they then have an asset which they can leverage or sell in a crunch.

Discrimination is alive and well

The unfair lending practices prior to the financial crash of 2010, caused the Black community to be unfairly targeted to buy homes at higher interest rates and under programs that could be considered predatory. Once the bottom fell out from the crisis, the programs designed to save borrowers from ruin, also had minor impact because the equity they had, became nonexistent as they bought at the heigh of the market. “As a result, the black homeownership rate dropped more than 2 percentage points from 2000 to 2010 and slid another 5 percentage points after 2010” (McCargo et al., 2020). Now, forty-four years following the Act, which was to end discrimination within lending, we are still seeing Black homeowners suffer from these same discriminatory lending practices. CNBC reported that “In 2020, HMDA data showed that lenders deny mortgages for Black applicants at a rate 80% than White applicants.” While not all applicants can qualify for a home, as there are guidelines in which one must adhere, the rate at which these Black borrowers are declined is astronomical. In 2018, Gallup and Brookings did a report stating that “A home in a majority Black neighborhood is likely to be valued for 23 percent less than a newer-identical home in a majority-white neighborhood; it also determined this devaluation costs Black homeowner’s $156 billion in cumulative loss” (Kamin, 2020). Appraisals are notoriously subjective, but this gap is hard to justify. The University of California at Berkeley reviewed seven million mortgages and identified that Black and Latin borrowers were given an interest rate of .08% higher than their white counterparts resulting in over $700M in extra interest by calendar year. (Folger, 2022). These are real current cases and real dollars being extracted from these Black households, which only proves that discrimination is alive and well within the lending world and needs to be stopped.

Conclusion

The United States has experienced the largest decline in Black homeownership in the past two decades, even while many attempts have been made to correct the errors of the past. Every President has made housing policy a top priority’ holding banks and lenders accountable for their efforts in improving homeownerships for all borrowers via the Fair Housing Act and Community Reinvestment Acts, but not enough has been done. As policies are enacted, unintended consequences are revealed and tend to further compound current issues. Focusing on amassing wealth remains paramount to improving financial position for generations, so aiding Black communities in this initiative is crucial. The net worth of individuals who are homeowners are significantly higher than those who are not homeowners.

Ensuring that the prejudice in lending is highlighted and eliminated will be crucial in curbing this issue. It is unacceptable that forty-four years following the elimination of discriminatory practices within the lending world, we continue to grapple with bad characters and bad practices which continue to hurt the Black communities. Real consequences need to be belied for these bad actors, whether it be an institution or individual.

References

Alexander, F. (2021, May 31). The importance of black homeownership. Clever Girl Finance. Retrieved March 26, 2022, from https://www.clevergirlfinance.com/blog/black-homeownership/

Allen, B. J. (2011). Race matters. Difference matters: Communicating social identity. Waveland

Press.

Connley, C. (2020, August 21). Why the homeownership gap between white and Black Americans is larger today than it was over 50 years ago. CNBC. Retrieved March 26, 2022, from https://www.cnbc.com/2020/08/21/why-the-homeownership-gap-between-white-and-black-americans-is-larger-today-than-it-was-over-50-years-ago.html

Folger, J. (2022, March 3). The History of Lending Discrimination. Investopedia. Retrieved April 9, 2022, from http://investopedia.com/the-history-of-lending-discrimination-5076948.

Hayes, A. (2022, March 7). What is redlining? Investopedia. Retrieved March 26, 2022, from https://www.investopedia.com/terms/r/redlining.asp

Kamin, D. (2020, August 25). Black homeowners face discrimination in appraisals. The New York Times. Retrieved March 26, 2022, from https://www.nytimes.com/2020/08/25/realestate/blacks-minorities-appraisals-discrimination.html

“Lesson Plan: The American Dream”. Library of Congress, Washington, D.C. 20540 USA. Retrieved April 4, 2022.

McCargo, A., Golding, E., & Choi, J. H. (2020, December 6). https://www.urban.org/sites/default/files/publication/100204/building_black_ownership_bridges_1.pdf. Urban Institute. Retrieved March 26, 2022, from https://www.urban.org/policy-centers/housing-finance-policy-center/projects/reducing-racial-homeownership-gap

Picardo, E. (2020, August). Gentrification. Investopedia. Retrieved April 9, 2022, from https://www.investopedia.com/terms/g/gentrification.asp.

Wake, J. (2020, September 19). The paradox of the U.S. Black home ownership rate. Forbes. Retrieved March 26, 2022, from https://www.forbes.com/sites/johnwake/2020/09/19/the-paradox-of-the-black-home-ownership-rate/?sh=76d7aaa529b9

Wikimedia Foundation. (2022, February 1. American Dream. Wikipedia. Retrieved April 9, 2022. From https://www.wikipedia.org/