Jim Armstrong, PHADA Policy Analyst
On March 23 in The Edge, an online magazine published by the Office of Policy Development and Research (PD&R), HUD published an article summarizing a December 1, 2020, panel sponsored by the National Housing Conference (NHC) entitled, “Closing the Black Homeownership Gap.” Connie Wright of Wells Fargo moderated the panel that included Steve O’Connor of the Mortgage Bankers Association, Lisa Wright of the National Fair Housing Alliance, Cy Richardson of the National Urban League, and Antoine Thompson of the National Association of Real Estate Brokers.
The issue of homeownership among African American households has been a topic of particular interest for several years, covered in publications by the Urban Institute, the Brookings Institution, and most recently by several media outlets including The New York Times and The Washington Post.
What Is the Homeownership Gap?
For African American households, the rate of homeownership in December 2020 was 44.1 percent, compared to a homeownership rate among white families of 74.5 percent. The overall national homeownership rate was 65.1 percent. Since the equity households hold in homes that they own is a significant element of net worth or wealth, the disparity in homeownership rates is a major contributor to a disparity in wealth between white and African American households. In 2020, the Brookings Institution reported that in 2016 the average wealth of African American households was $17,150, one tenth the average net wealth of white households.
As a case in point, Michelle Singletary, an African American finance columnist, recently described the difference in value of her home in Prince George’s County, MD, and the value of a comparable home in a predominantly white subdivision. Her home would be valued 40 percent higher in that subdivision.
In a 2019 presentation for the NHC, Cindy Waldron of Freddie Mac discussed a study of the differential transition from renters to homeowners between 2012 and 2018. That study found that 12 percent of 2012 renters transitioned to homeownership by 2018, and that 13.8 percent of white households made that transition while only 6.8 percent of African American households became homeowners.
Sources of the Gap
Lisa Wright highlighted the impact of historical housing discrimination on homeownership rates and the value of homes for African American Households. The federal practice of redlining African American neighborhoods (preventing issuance of mortgage insurance in those neighborhoods and so severely restricting the availability of home mortgages). The practice has been outlawed for approximately 50 years, but redlined neighborhoods continue to have lower rates of homeownership and lower housing values.
Beyond the legacy of historical housing discrimination, Steve O’Connor of the Mortgage Bankers Association described four sources for the homeownership gap.
The Knowledge Gap
While three million African American households are “mortgage ready” (including a credit score higher than 620, a debt-to-income ratio lower than 25 percent, no foreclosures or bankruptcies in the prior 7 years, no serious delinquencies in the prior year), many of these households believe incorrectly that (1) they must make a down payment of 20 percent of the value of the mortgaged property, or (2) that they need a credit score much higher than 620.
In her 2019 presentation, Cindy Waldron noted that although there were three million mortgage ready African American households, the rate of African American readiness was 19 percent, compared to 32 percent in the general population, pointing to potentially disparate impacts of mortgage ready criteria.
The Trust Gap
Historic discriminatory practices that exploited African American households disproportionately, restricted their location choices, or established and maintained economic disincentives to homeownership also contribute to the homeownership gap. These practices are ongoing. A June 2020 working paper published by the Washington Center for Equitable Growth found that assessment practices and appeals processes resulted in African American and Hispanic households paying a 10 percent to 13 percent premium in local taxes.
For African American households, the rate of homeownership in December 2020 was 44.1 percent, compared to a homeownership rate among white families of 74.5 percent. The overall national homeownership rate was 65.1 percent.
The trust gap also results from past African American experiences in real estate markets. Ta-Nehisi Coates has described the experience of households in Chicago with “rent to buy” or “contract buying” arrangements that resulted in estimated loss of between $3 billion and $4 billion in household equity and wealth among affected African Americans during the 1950s and 1960s.
The Market Gap
There may be a lack of satisfactory inventory in communities where African Americans prefer to live. A 2009 study found that, while white households express a strong preference for predominantly white neighborhoods (and that there is a tipping point for neighborhood preference when neighborhoods become more than 10 percent non-white), African Americans typically express a preference for neighborhoods that include diverse populations. Diverse neighborhoods may have been subjected to historical redlining, disinvestment in public infrastructure and little private economic development. These effects may adversely affect both the value of real estate, the quality of real estate, and the availability of mortgage debt to improve that quality.
The Resources Gap
O’Connor’s resource gap results the underutilization of tools available to home buyers and real estate professionals that facilitate increasing homeownership. Tools may include down payment assistance, homeownership tax credits, first time homebuyer assistance, closing cost assistance, and other incentives.
Other Gap Considerations
While the NHC panel raised several important considerations concerning the African American homeownership gap, the description in PD&R’s The Edge did not consider other systemic issues contributing to the gap. For instance:
- FICO and other credit report scores may systemically discount the financial performance of African American households. Those scores give weight to households’ uses of credit, and African Americans tend to use credit less frequently than white households.
- “Credit worthiness” may result in mortgagees offering African American households higher interest rates based on ostensibly race neutral criteria. Coupled with other financial disincentives such as the property tax premium paid by African American and Hispanic household, African Americans may not experience the financial advantages available to white households through homeownership.
- Neighborhoods of color may be at greater risk for declines in housing value than white neighborhoods, significantly affecting the attraction of homeownership.
Impacts of the Gap
There are several clear impacts of this homeownership gap on creation of wealth.
- Markets tend to undervalue housing located in neighborhoods with significant non-white populations. White households’ preference to live in predominantly white neighborhoods may result in a smaller pool of buyers for housing in neighborhoods with more diverse populations, limiting demand for that housing. Buyers preferring to live in these more diverse neighborhoods may have lower incomes and less wealth. Both tend to depress the potential value of housing and its rate of appreciation.
- These effects on housing prices tend to compound themselves over time. The national rate of appreciation for owner occupied housing is about 3.8 percent. At that rate, the racial difference in appreciated equity over 10 years would amount to about $450 per $1,000 in differential value.
- African American localities also suffer from undervaluation of real estate, affecting those localities’ abilities to invest in schools and other locally supported services and infrastructure. In turn, these lower investment levels have a depressing effect on real estate values and appreciation.
- The major federal investment in housing is through the income tax mortgage interest deduction. Although tax advantages have changed since the last change in income tax law, differential valuation and appreciation still affect any benefit taxpayers derive from home ownership. Based on the national median home price, the price differential for housing in African American neighborhoods, the national median income tax rate, and current mortgage interest estimates, households in undervalued African American neighborhoods my lose an annual tax benefit of almost $800.
- A major advantage of homeownership involves the federal disregard of capital gains on owner occupied housing when the housing is sold. Currently homeowners may exclude up to $500,000 of such capital gains from their income for tax purposes. Artificially depressed housing values and slower appreciation of those values means that African American homeowners enjoy significantly lower benefits from these untaxed capital gains than white homeowners.
- While $500,000 in home capital gains are untaxed, there is no particular tax advantages provided for capital losses. The literature indicates that homeowners of color are much more likely to experience capital losses on their homes than white homeowners.
The NHC panelists cited several examples of steps that could help ameliorate the size and the impact of the African American homeownership gap. Cy Rogers of the National Urban League described creation of local savings and credit hubs that use social capital and community trust to change attitudes and sophistication concerning homeownership among African American households. The Mortgage Bankers Association is experimenting with approaches selectively targeting (1) short term opportunities for homeownership among mortgage ready borrowers, (2) medium term opportunities among households needing to establish attractive credit histories, and (3) long term opportunities for households who need to rehabilitate credit records and build savings accounts.
Michelle Singletary has argued that effective solutions to the homeownership gap depend first on acknowledging that redlining practices still affect African American homeowners, homebuyers, and neighborhoods. These practices continue to depress the valuation of housing in African American neighborhoods, and those devaluations continue to compound over time. Finally, scholars such as Deborah Brown argue for a reexamination of federal, state, and local tax policies that tend to depress financial benefits available to African Americans and other People of Color from homeownership.