The (un)American Dream: The Impact of Race on Homeownership

As I began my research into personal finance, one of the most surprising things that I learned involves the nexus between race and homeownership.

The conventional perspective is that homeownership causes wealth.  Unfortunately, the facts demonstrate that it’s reversed: It’s much more likely that wealth causes homeownership.

The first thing that needs to be stated is the disparity in homeownership across racial and ethnic lines: 73% of whites, 45% of Blacks, and 47% of Latinos

In particular, we are seeing less members of the Black community between the ages of 35 - 44 years of age purchasing homes. In 1990, 45% were homeowners, in comparison to 33% in 2015. This is half the level for whites within the same age bracket.

We also see this in terms of median home equity, which is largely influenced by neighbourhood values: $86,000 for white homeowners, $50,000 for Black homeowners, and $48,000 for Latino homeowners.

This can be traced back to the National Housing Act of 1934 (aka the “Capeheart Act”). While it’s intention, as part of the New Deal, was to make housing and mortgages more affordable, it effectively redlined Black neighbourhoods. In the Underwriting Handbook, which determined what properties it would approve mortgages for, effectively designated Black and low income neighbourhoods as credit risks and the riskiest for lending. What was called, “residential security maps,” were designed by race and reinforced segregation and discrimination in lending.

This practice isn't just a thing of the early to mid 20th century. In 2012, Wells Fargo Bank admitted that they directed Black and Latino borrowers into subprime mortgages when non-Hispanic white borrowers with similar credit scores received prime loans. This practice undeniably contributed to the collapse of the housing market in 2006.

Since then, Black renters — specifically those who belonged to the foreclosure population — have had a tougher time delving into homeownership. Some of these factors include: the need for pristine credit in order to obtain access to mortgages and misconceptions when it comes to lender requirements for a downpayment, and stable and relatively middle to high incomes. While many of us, myself included, warn others about the dangers of taking on too much credit, the research suggests that many Black and Latino Americans are having trouble accessing the necessary credit to become homeowners. 

However, the wealth gap amongst racial and ethnic lines does not stop once homeownership is achieved but rather demonstrates the effects of all the prior factors when combined. For every $1 that a Black homeowner accrues because of homeownership, a white homeowner accrues $1.34. For every $1 that a  Latino homeowner accrues because of homeownership, a white homeowner accrues $1.54. What is, for many, the main pathway to financial security and independence, is exacerbated for Black and Latino homeowners.

I view this as an incredible example of how discrimination compounds. What may be viewed as an issue that originates in income disparity amongst racial and ethnic lines, and of course that obviously plays a major factor, public policy decisions clearly have a larger impact than is discussed.

What’s the remedy? I see it as three-fold: (1) tackle the rising income equality that bars people of colour from becoming homeowners, (2) strong monitoring and enforcement of credit lenders, and (3) restructuring the qualifications for good credit terms. I am of the view that of this can be improved by strong public policy decisions that considers the social and historical context of homeownership, at least within the U.S. As Ezra Klein succinctly states, "There are just some things that are too important to be left to the market."