Closing America's Homeownership Gap

Story // Sarah C.P. Williams

Boosting homeownership among Black people in America begins with owning up to a history of racial discrimination in the real estate and mortgage industries, say GW researchers studying the homeownership gap.

“I hate to talk about reparations because people think it’s such a dirty word and shut down when they hear it, but at this point we need approaches that are directly enabling first-generation Black homeowners.”

VANESSA PERRY

Cumulative Disadvantage

President Franklin Roosevelt called real estate “about the safest investment in the world” and, in the midst of the Great Depression, established the Federal Housing Administration to revive mortgage lending—at least for white Americans. Mortgages remained still largely unobtainable for Black Americans, in part due to how lenders and agencies interpreted a set of maps that “redlined” Black neighborhoods across the country, categorizing them as risky investments. 

Since then, numerous policies and initiatives have aimed to boost Black homeownership rates; most notably, the Fair Housing Act, signed into law in 1968, prohibited discrimination in the sale, rental and financing of housing. 

Yet, in the NAREB-commissioned 2020 State of Housing in Black America report, Perry and her co-authors documented just how far the United States still is from meeting the goals of equity outlined in the Fair Housing Act. Black homeowners pay higher interest rates and higher insurance rates than white homeowners; their houses have lower values and appreciate more slowly. In an Urban Institute article published earlier this year, Perry and her colleagues calculated that Black mortgage applicants are more likely to be denied than white applicants—even Black applicants with incomes more than 150 percent of the area median income (AMI) have a higher denial rate than white applicants with incomes less than 80 percent of the AMI. 

The denials aren’t generally fueled by overt discrimination, but rather by engrained practices in the mortgage industry that make it hard for Black Americans—with less intergenerational wealth, poorer credit scores and a lower debt-to-income ratio—to qualify. While only 18 percent of non-Hispanic white households have more than $40,000 in student loans, for instance, a third of Black households carry that much student loan debt. 

“The way we measure risk does nothing but pass on historical discrimination and racism,” says Perry. “And so, to the extent we keep measuring risk in the same way, we’ll always be in a situation where Black and Hispanic home buyers have to pay more for mortgage loans.”

Even when humans are removed from the process—as mortgage companies increasingly turn to artificial intelligence-based tools to gauge credit risk—this kind of engrained historical discrimination cannot be easily removed from the equation, Perry says. New models of credit risk proposed by some researchers to take the weight off traditional measures of wealth have included a wide variety of data, from utility and rent payments to social media activity, GPS data, club membership and even school grades. 

“But even these factors can be unknowingly correlated with race or with neighborhood,” says Perry. “So these new tools have to be really deeply looked at from a fairness perspective.”

A Larger Set of Problems

When Black Americans do buy a home, they still face other barriers that can prevent them from accumulating wealth over time. For one, homeowners’ insurance tends to be harder to obtain and more expensive. In a Journal of Urban Affairs article, Gregory Squires, a GW professor of sociology and public policy and public administration who has long studied fair housing policies, concluded that racial profiling by the property insurance industry contributes to diminished opportunities for racial minorities. Even after controlling for other demographic factors, race is significantly associated with the availability and cost of insurance policies, he says. 

Another problem revolves around appraisals. Home values in predominantly Black neighborhoods have historically been—and remain today—lower than those in predominantly white neighborhoods. It’s a cycle that is hard to break out of, since home appraisers rely on “comps,” or recently sold comparable properties, to set values. When one home receives a low appraisal, it then becomes a benchmark for the appraisal of nearby houses. 

“When a property comes back with a very low appraisal, it suppresses the property value not just for the individual family but for the entire neighborhood,” says Squires, who has worked with HUD's Office for Fair Housing and Equal Opportunity. “It means the effects of yesterday’s and today’s discrimination keep persisting into the future.”

Appraisal bias—the undervaluation of homes owned by Black families or situated in predominantly Black neighborhoods—has received national attention in recent months. In March, the White House announced a plan to address home appraisal inequities. Squires is currently collaborating with the city of Philadelphia on a report about what local municipalities can do to solve appraisal bias. 

Last year, the real estate brokerage Redfin crunched the numbers on 7.3 million home sales to conclude that homes in mostly Black areas are valued at about $46,000 less than comparable homes in mostly white areas. In Philadelphia, there is a 27 percent undervaluation of homes in Black neighborhoods, according to a paper Squires published last summer in the journal Poverty & Race. One driving factor? The vast majority of all home appraisers—97 percent, according to one White House report—are white. Increasing diversity in the appraisal, real estate and mortgage industries, Squires says, could help lessen appraisal bias. 

No Silver Bullet

Diversity in the housing industry, though, is just a piece of the puzzle. “Wall Street investors, huge lending institutions, regulators, economists, public policy experts and countless housing advocacy groups have been working on this problem for many years,” says Perry. “No one has found a silver bullet.”

Researchers like Perry and Squires work collaboratively with all those other players to help come up with feasible solutions that might close the housing gap. Both local and federal programs and laws, they say, can make a difference. In 2015, the Supreme Court ruled on the legality of disparate impact claims under the Fair Housing Act, determining discrimination doesn’t have to be intentional to be illegal. 

“Sometimes there can be violation of civil rights laws even when there’s not a proven intent to discriminate,” says Squires. “So if a housing provider, for example, refuses to make loans on homes that are valued below a certain amount, that might be a violation of the law because it disproportionately impacts people of color.”

In 2021, the White House issued a series of memorandums and executive orders around the concept of affirmatively furthering fair housing—underscoring the role of the Fair Housing Act in not only refraining from discrimination but also taking actions that “undo historic patterns of segregation and other types of discrimination and that afford access to long-denied opportunities.”

Those legal actions, Squires says, were a turning point for pushing the housing industry to root out even unintentional discrimination. “It means it is a lot easier for lawyers and advocacy groups to file complaints against housing providers that are discriminating either in overt or very subtle ways,” he says. 

And with those legal frameworks in place, Perry believes that now is the time to turn to special purpose credit programs, established under the Fair Housing Act, which aim to explicitly help groups of disadvantaged people obtain mortgages through financial assistance. Perry and her collaborators at the Urban Institute have argued that lenders can use these programs to help reduce the racial homeownership gap. They could, for instance, offer favorable mortgage terms, down payment assistance, streamlined refinances, flexible underwriting or income restriction exemptions to Black home loan applicants or applicants who want to buy in predominantly Black neighborhoods—two ways of defining the disadvantaged group. 

In 2019, for instance, Vice President Kamala Harris—then a senator and presidential candidate—proposed a grant program, to be administered under HUD, which would provide money toward a down payment or closing costs for low-income homebuyers who live in historically redlined neighborhoods. More recently, Chase Bank announced $5,000 loans for qualified homebuyers in Black neighborhoods. 

Perry is also a fan of average-risk pricing instead of risk-based pricing—the idea that every person who qualifies for a mortgage receives the same terms. This could help lower mortgage payments for Black families overburdened with student loans, for instance. 

Critics of these kinds of approaches, Perry says, worry that easing the barriers to homeownership could lead to a dramatic rise in foreclosures and a housing crash. She argues, however, that there are millions of Black households that are low risk for defaulting on a mortgage yet don’t meet today’s standards. In the 2020 “State of Housing in Black America” report, she and her colleagues cited a Freddie Mac study that estimated there are currently 2.9 million Black “mortgage-ready” households in the country—with heads of household under 45 years of age who have the income and credit history to qualify for a mortgage. 

“A lot of experts believe that the credit standards that have been in place have been far stricter than they need to be,” she says. “Nobody wants to recreate a subprime crisis, but the market has many more checks and balances now to keep that from happening.”

“Sometimes there can be violation of civil rights laws even when there’s not a proven intent to discriminate.”

GREGORY SQUIRES

Benefits for All

Other economists argue that boosting minority homeownership alone cannot close the wealth gap; there are too many other factors correlated with long-term savings. Perry, however, notes there are research-backed benefits to homeownership—even aside from its potential for financial gain.  Homeownership, she points out, affects the whole economy and benefits entire communities. 

“Homeownership is connected to the ability for people to build equity, but there are also all these other benefits that can accrue almost immediately with increased homeownership rates,” says Perry. “You see improved public education and other public services. There’s more political participation.”

Stable housing can also bring health benefits. In 2021, Squires and Antwan Jones, an associate professor of sociology at GW, reported in the medical journal Circulation that cities with inclusionary zoning policies—which incentivize developers to set aside a share of new housing units for low- to moderate-income families—have lower rates of heart disease and other cardiovascular illness. “Stable, affordable housing in healthy communities can reduce stress and increase access to fresh produce, parks, jobs, safe streets and other amenities that help people stay healthy,” said Squires when the paper was published.

Today, housing prices continue to boom, rising nearly 20 percent between February 2021 and February 2022. Those rising prices help line the pockets of homeowners with additional equity while pricing non-homeowners out of the home buying market—again, a phenomenon that only exacerbates the racial homeownership gap. 

“Our research would indicate that without a concerted effort, the homeownership gap is going to grow,” says Ratcliffe, speaking about data analyzed by the Urban Institute. “If we want to turn things around, we really have to stay deeply engaged.”

Perry is as engaged as ever, advocating for the lending and real estate industries to address the issues head on. “For a long time, people would just not address that historical discrimination and redlining were still underlying causes of the homeownership gap,” she says. Now, Perry says, lenders and policymakers are more aware of the continued and compounded role of this history, and the time is ripe for solutions.