Liberty Matters

Is There Systemic Racism in Home Ownership?

Systemic racism refers to systems and structures that create and foster racial inequality. In the case of housing, examples of systemic racism include high rejection rates for home mortgages, steering by realtors, low ball appraisals, zoning laws and the vestiges of Depression Era actions by the Federal Housing Administration (FHA). In this essay I will elaborate on factors that are asserted to affect home ownership: the accept/rejection of mortgage applications and the insurance guarantee by the FHA. Steering by realtors would not affect homeownership rates, only where the homes are located. Similarly, low ball appraisals would not affect homeownership rates - only which house is purchased. For instance, if the purchase price of the house were greater than the appraisal and if the buyer were not willing to make up the difference, then the buyer would seek another house to purchase. Zoning laws would affect the quality of the housing stock and its price but may have a lesser impact on homeownership rates. However, the availability of FHA guarantees may affect the homeownership rate if a condition of the mortgage is to have it insured.
It has become convenient for many to claim that systemic racism occurs whenever there are racial disparities. This, of course, assumes that there are no inherent differences between races and that where such differences occur, they must be the result of systemic racism. One such instance is in the case of housing where home ownership by Whites is greater than that of minorities.  In 2019 the home ownership rate for Whites was 73.3 percent while that for Blacks was 42.1 percent.[1] Interestingly, this gap was the largest since the Census started reporting the data in 1994. Does this imply that racism in homeownership is increasing?
Those who argue that this is due to systemic racism point to discrimination in the mortgage loan decision by lenders as one factor where Black applicants are more likely to be denied than White applicants. For example, a report by CNN found that one major lender accepted over 75 percent of applications from Whites while denying over 50 percent of Black applicants.[2] While CNN does not explicitly state that the acceptance disparities are due to racism, it does illustrate that one of the reasons for disparities in home ownership may be due to racial disparities in the acceptance of mortgage applications. Also, as CNN rightly points out, the application denial by one institution does not mean that the applicant cannot get the loan from another lender. If this is the case, the rejection statistics are not an accurate picture of why Blacks have lower rates of home ownership.
I have done extensive research in the area of discrimination in lending and am co-author of its seminal paper.[3] When we first started the analysis our priors were that discrimination would likely occur in markets characterized by little competition among lenders. Most mortgage loans were made by savings and loans. Credit unions could not originate mortgages. We found weak evidence of discrimination by race and a stronger indication of redlining. Economics tells us that if there is excess demand for mortgages and few lenders, then the lenders can reject loans that would be profitable because of the limited supply of funds available. However, this is not the case today. Now banks, savings and loans, credit unions, and online lenders can originate mortgages. Thus, rejection of profitable loans would be irrational on the part of the lenders. In many institutions the mortgage loan officer is compensated by the mortgages underwritten. It would then be irrational for a loan officer to reject a qualified applicant if it lowered the officer’s compensation. Also, the regulators who examine the lender’s decisions are junkyard dogs looking for discrimination. As a consequence, a lender who discriminates in today’s environment is not only irrational but is also foolish. It would be akin to speeding at 100 MPH with a state trooper at every mile marker. Finally, many mortgages are not held in the originator’s portfolio and are sold to Fannie Mae, Freddie Mac, and in the secondary market meaning that the originator does not bear all the risk associated with making a bad loan.
Let us assume that the mortgage can be rejected based either on the riskiness of the applicant or the riskiness of the location of the property (redlining). Even if the minority applicant were equally qualified for mortgage application approval but the property site were deemed risky, then more applications from minorities would be rejected.
The statistics for percent homeownership by race need to be decomposed. As it reads, the assumption (which is certainly false) is that the homeowners have the same characteristics save for race. However, Zillow reports that “Households in the bottom 20 percent of income have a homeownership rate of 30 percent nationally, while those in the top 20 percent have a homeownership rate of 87 percent.”[4] Given that there are greater percentages of low income minorities than Whites, the differences in home ownership are not surprising. What needs to be done is to look at home ownership by income cohorts by race. For example, Choi points out that “The $38,183 median household income of Black households is substantially lower than the $61,363 median household income of White households. If the household income distribution were the same for White and Black households, while other household and MSA level factors remained constant, the gap between Black and White homeownership rates across MSAs would drop by 31 percent, or 9.3 percentage points.”[5] Choi finds that much of the difference can be attributed to income, marital status, and credit scores. He notes “Compared with White households, Black households are less likely to marry. If Black households were married at the same rate as White households, the Black-White homeownership gap across MSAs would decrease by 27 percent, or 8.1 percentage points, once other factors are controlled for. Credit scores account for part of the gap as well. To quote Choi “More than 50 percent of White households have a FICO credit score above 700, compared with only 21 percent of Black households. Additionally, 33 percent of Black households have credit-use levels that are insufficient to generate a credit score (thin files), and only 18 percent of White households have a thin file.”
Thus, is the homeownership gap due to systemic racism? One could argue that the differences that explain the gap: income, marital status, and credit scores, are due to racism. But that assumes that the gap would persist within each category. That is poor Blacks have lower homeownership than poor Whites, single Blacks have lower homeownership than single Whites, and Blacks with low credit scores have lower homeownership rates than Whites with low credit scores.
Regardless of differences between cohorts, two Federal agencies chartered in the 1930s were instrumental in promoting systemic racism in housing. The Home Owners’ Loan Corporation (HOLCC) was established in 1933 to refinance home mortgages that were in default. The HOLC made maps of neighborhoods and color coded them according to risk. The most risky neighborhoods were colored red leading to the term redlining. However, the HOLC made loans in these areas which were in many cases Black neighborhoods.[6] This was in contrast to the actions of the FHA which as a matter of course denied Federal insurance guarantees to Black borrowers. While the HOLC concentrated on existing housing, the FHA focused on new housing. The denial of loan guarantees therefore affected the growth in new homeownership and had an adverse impact on new Black homeownership.[7] Rose notes that from its inception, the FHA excluded core urban neighborhoods with Black borrowers. In that these neighborhoods were colored red by HOLC, the FHA engaged in redlining. Rose states “Our research leaves no doubt that the existence and legacy of redlining is real. We argue, however, that to the extent that federal agencies institutionalized redlining by drawing specific borders, this largely occurred through the FHA.”[8] More significantly, Rothstein asserts that the FHA’s policy explicitly forced Blacks to live in different locales than Whites. He states “The second program that the federal government pursued was to subsidize the development of suburbs on a condition that they be only sold to White families and that the homes in those suburbs had deeds that prohibited resale to African- Americans.”[9] Rothstein gives the example of Levittown in New York where he says “What the federal government did, the FHA, is guarantee bank loans for construction and development to Levittown on condition that no homes be sold to African-Americans and that every home have a clause in its deed prohibiting resale to African-Americans.”
Thus, the Federal government contributed to the pattern of racial segregation in housing and diminished the ability of black borrowers to own homes. Although these actions are in the past with the passage of the Fair Housing Act of 1968, that act looks forward and not to the past. Research has shown that cities mapped by HOLC are today more segregated than cities that were never mapped. Those areas that were mapped saw decreases in property values resulting in increased racial wealth gap and lower appraised values.[10]
Given that the effects of the HOLC and in particular the FHA remain today and are significant determinants of the pattern of Black homeowners, property values, and appraisals this points to an important point regarding systemic racism. Such racism that is created to foster inequality may have its greatest impact if endorsed by the government whether local, state, or in this case Federal. Government agencies promoting racism will find that individual citizens and groups will reinforce the racist policies of the government. Hence, individual lending institutions, zoning ordinances, realtors and appraisers may exercise their prejudices without fear of retribution by the government. In the case of home ownership, while it may be the case that racism in housing is less evident than in the past, the legacy created by the FHA still remains.
[1] “Home ownership rates show that Black Americans are currently the least likely group to own homes,” USA Facts, October 3, 2023.
[2] Casey Tolan, Audrey Ash and Rene Marsh, “The nation’s largest credit union rejected more than half its Black conventional mortgage applicants last year.” CNN, December 12, 2023.
[3] Harold Black, Robert L. Schweizer and Lewis Mandell, “Discrimination in mortgage lending.” American Economic Review, May 1978.
[4] Cody Fuller, “Home ownership really is about the money,” Zillow, April 22, 2015.
[5] J. H. Choi, “Breaking down the Black-white homeownership gap,” Urban Institute, February 21, 2020.
[6] See Jonathan Rose, “Revising how two Federal housing agencies propagated redlining in the 1930s,” Policy Briefs, Federal Reserve Bank of Chicago, April 2022.
[7] My parents were denied an FHA guarantee in their purchase of their first home in Atlanta.
[8] Rose, p. 3.
[9] Richard Rothstein, NPR interview, “The Color of Law details how U.S. hosing policies created segregation, May 17, 2017.
[10] Jacob faber, “Impact of government programs adopted during the New Deal on residential segregation today,” Research Policy Brief 51-2021, Institute for Research on Poverty, February 2021.