Fifty-two years ago, the Fair Housing Act made discrimination based on race, religion, national origin, or sexual orientation illegal. This act helped change how homes were sold and financed in Southern states and in Northern cities like Chicago, where Dr. Martin Luther King launched the first campaign for open housing in 1966.
Despite the Fair Housing Act, however, the gap between Black and white homeownership is higher today than it was half a century ago. Neighborhoods like Washington D.C.’s Anacostia and Chicago’s South Side are not only known for their populous Black community, but they are also hotbeds of substandard housing and abject poverty. No statistic illustrates the lack of progress more dramatically than the differences in homeownership rates between races.
Four Factors Contributing to the Racial Homeownership Gap
The national drought of affordable homes in suburbs within commuting distance of employment centers is the one of the leading causes of increasing gentrification. Gentrification, the movement of young, white homeowners into urban, traditional Black neighborhoods, is increasingly changing the racial profile of older American cities. It’s driving Black homeowners and their families out of known Black communities and forcing them to rent rather than buy. Nearly 20% of communities with lower incomes and home values have experienced gentrification since 2000, compared to only 9% during the 1990s. Gentrification drives up home prices and property taxes, forcing many Black households and potentially Black homeowners to rent.
Many Millennials move to inner-city neighborhoods to be closer to work, to live an urban lifestyle, and to increase their equity by renovating older single-family homes. The most important reason, however, is that they can’t afford to buy in suburban neighborhoods due to a lack of affordable housing. An increase in affordable housing within suburban neighborhoods will help diversify communities and start to dissipate gentrification in urban areas. According to Joe Kriesberg of the Joint Center for Housing Studies at Harvard University, another way to help lessen the racial homeownership gap caused by the affordable housing drought would be through dispersing the resources of affordable housing developments to focus on homeownership rather than renting. “Right now, the Commonwealth of Massachusetts spends 100 percent of its affordable housing development dollars on rental housing,” says Kriesberg. “Shifting 5 to 10 percent to homeownership could help stabilize our communities.” While acknowledging this needs to be on a national level in order to lessen the gap, it could be a potential solution for some major urban areas.
Discrimination in mortgage lending continues today despite the Fair Housing Act. A 2019 study by economists at UC Berkeley found that while lenders can discriminate against minorities only based on creditworthiness under U.S. Fair Lending law, it’s common to find that minorities pay more basis points in interest for home-purchase and refinance mortgages due in large part to algorithms and data used in lending practices that may not favor minorities.
If you’re a minority borrower and you want to arm yourself with the proper information before going through a pre-approval process, then it’s important to know the identifying factors of mortgage lending discrimination. The Federal Trade Commission compiled a list of ways in which you can identify these malpractices. It includes:
- Requiring a co-signer if you meet the lender’s requirements.
- Discourage you from buying in a certain neighborhood due to the racial makeup.
- Impose different conditions on a loan because of race.
- To better protect yourself against algorithmic lending practices, asking for odd number loans (like $19,900 instead of $20,000) and secure multiple quotes according to American Banker.
In order to best protect yourself, the FTC recommends buyers looking to take out a loan do the following before applying:
- Have a copy created of your credit report and make sure all information is up to date.
- Shop with several lenders. Having multiple lenders provide multiple rates can help you identify the lowest one possible.
- Be prepared to negotiate. This is common in mortgage lending and many fees you may be looking at paying can easily be negotiated.
Federal government support for policies advantageous to minorities is shrinking. Leading up to the Great Recession, subprime mortgage lending allowed borrowers with lower credit scores to obtain mortgages they would not normally be approved for. While this opened the door to homeownership for many minority families, it also disproportionately affected them when the housing market crashed. Between 2007 and 2009, Black and Latino homeowners defaulted on their mortgages at almost twice the rate of white homeowners.
In 2019, the Treasury announced its Housing Finance Reform Plan to roll back previous administrations’ policies that allowed high-risk borrowers to obtain mortgages. Supporters of this plan embrace its fiscal responsibility, as it aims to reduce the economic fallout of widespread mortgage defaults. Critics, however, say the plan disproportionately affects minorities by preventing them from becoming homeowners, thus perpetuating their generational poverty.
In 2020, the Department of Housing and Urban Development repealed the Affirmatively Furthering Fair Housing rule. This legislation required communities receiving federal housing grants to work toward eliminating housing segregation. The replacement act, named Preserving Community and Neighborhood Choice, institutes broader standards for defining “fair housing,” and allows communities to self-certify their compliance with those standards. Supporters say this gives communities more autonomy to apply federal funds more appropriately to reduce crime and boost home values, but critics say it eliminates enforcement or oversight of fair housing policies.
Black first-time homebuyers have a harder time raising money for down payments and qualifying for low down payment loans than whites. Raising the money for a down payment is the highest hurdle any first-time buyer faces. Between 1999 and 2015, white young adults ages 18 to 34 had the highest homeownership rate of 42%, while only 18% of Black young adults were homeowners. The Urban Institute found that having wealthier parents explains 12% of the 24 percentage-point gaps in the Black-to-white young-adult homeownership rate because wealthy parents are more likely to help their kids with their down payments. Many Black first-time buyers simply aren’t aware of the thousands of down payment assistance (DPA) programs that could help them get a down payment. The lower down payment loan products require higher credit scores than loans requiring 20% down.
Multiple studies have also found that down payment assistance programs have been especially beneficial for racial and ethnic minority borrowers. In fact, Harvard found that DPA programs were particularly helpful for minorities. Findings revealed that Black borrowers were more likely to get DPA help through either a government program, a community grant, or a second mortgage. However, awareness of these programs is shallow among many first-time buyers. Here are just a few:
- FHA Loans: One of the most popular and well-known financing options, these loans are ideal for first-time buyers. Depending on the applicant’s credit score, FHA loans can offer mortgages with a down payment as low as 3.5%, compared to traditional mortgage loans that typically require 15-20%.
- USDA Rural Development Housing Programs: Among its multiple programs, the USDA can offer low-rate mortgage loans and no down payment requirements for low-income residents in rural areas who wish to buy or build a home.
- State Housing Financing Agencies (HFA): HFA’s provide states with funds to help low- to moderate-income families with down payments or closing costs, usually independent of government operations. To see what HFA assistance is available in your state, click here.
- The Chenoa Fund: According to its website, this program “provide(s) tools that open doors to homeownership for individuals who have the income and credit history to afford a home, but may lack the ability to accumulate a down payment.”