Black homeownership is in crisis. Although homeownership rates for other racial groups have largely recovered since the 2008 housing crisis, black homeownership continues to decline, recently hitting an all-time low in the first quarter of this year.
Homeownership is beneficial for building household wealth, increasing intergenerational economic mobility, offering a hedge against inflation, and increasing civic engagement, all of which make the ongoing decline in black homeownership deeply troubling.
At the Housing Finance Policy Center’s recent data talk on the black homeownership gap, experts presented important data on the state of black homeownership. These five facts effectively sum up the crisis.
1. The current 30-percentage-point gap between black and white homeownership is larger than it was in 1968, when housing discrimination was legal
With the passage of the 1968 Fair Housing Act, the federal government prohibited housing discrimination on the basis of race. But today the black-white homeownership gap is actually larger—30.1 percentage points, as of 2017—than it was when lenders could legally give prospective white homebuyers preferential treatment, according to Urban Institute research associate Jung Hyun Choi.
The racial homeownership gap is tied to the racial wealth gap, as well as to the trend of rising economic inequality more generally. “Homeownership is the main component of wealth for most households,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. “It does explain most of the difference in wealth across segments of the population.”
2. If the black homeownership rate were the same today as it was in 2000, America would have 770,000 additional black homeowners
Black homeowners have been the slowest to recover from the Great Recession, and their homeownership rate has decreased to below precrisis levels. Choi’s research demonstrates that there would be 770,000 more black homeowners if the homeownership rate recovered to its precrisis level in 2000.
Arthur Acolin, an assistant professor of real estate at the University of Washington in Seattle, confirmed this trend. “For both black and Hispanic households, there was an increase in homeownership between 1989 and 2005,” he said. “But when we look at the 2005 to 2013 period, the decrease was such that it more than wiped out the increase.”
3. Homeownership is lower for black college graduates than for white high school dropouts
“African Americans with four-year college degrees have a lower homeownership rate than white Americans without a high school diploma,” said Choi, citing data from the 2017 American Community Survey.
Although homeownership rates increase as educational attainment increases for both black and white Americans, white high school dropouts have a homeownership rate of 60.5 percent, compared with 56.4 percent for black college graduates.
Student loan debt was mentioned as a potentially significant contributor to the growing gap between black and white homeownership. Of all racial groups, African Americans have more student loan debt, and African Americans with a college degree are five times more likely to default (PDF) on their student debt than white Americans. These inequalities in the shouldering of the student debt burden may therefore also be contributing to the widening homeownership gap, as those who carry or default on student debt are less likely to meet mortgage lending credit standards.
4. Black borrowers are less likely to meet the traditional credit standards necessary to qualify for a mortgage
Compared with white Americans, black Americans typically have lower FICO scores and a higher percentage of missing FICO scores, according to Jaya Dey, a senior economist in the Single-Family Affordable Lending and Access to Credit division at Freddie Mac.
According to the research Dey presented, the white-black gap in transition from rental to homeownership is 7.5 percent as of 2018. She explained, “Credit factors, which capture FICO scores, missing FICO indicators, ‘clean’ thin file indicators, and various measures of DTI [debt-to-income ratio], contribute substantially to the white-minority gap.”
These differences in credit scores by race can be at least partially explained by the forces of structural racism in the financial system. Research has shown that the legacies of redlining and community segregation have limited black borrowers’ access to traditional credit and exposed them disproportionately to predatory lending sources.
To close the gap, credit data systems and technologies must be designed to produce nondiscriminatory and fair outcomes for black borrowers. Choi’s research also reinforces the role of credit scores in the widening racial homeownership gap. She found that 21.9 percent of the gap can be explained by differences in FICO score distribution between black and white Americans.
5. Seventeen percent of the black-white homeownership gap can’t be explained by identifiable factors
Even when accounting for individual factors such as marital status, income distribution, FICO scores, age, median household income, and city segregation, Choi found approximately 17 percent of the black-white homeownership gap remains unexplained.
Acolin said that although lower and decreasing permanent incomes contribute to the gap, there was an increase in the unexplained portion over time. This suggests the need for more research into the specific barriers to homeownership for African Americans. And it makes clear that ensuring fair housing and fair lending compliance is imperative to addressing the racial wealth and homeownership gaps.
One policy solution: Improve access to credit
The panel of experts described alternative methods to assess creditworthiness as one way to help more black borrowers achieve homeownership. For instance, rent payments could be considered in credit assessments—because African Americans are more likely to be renters than white Americans—and consistent rent payment is one of the strongest indicators of whether someone will be able to pay back a loan.
Similarly, payments on telecommunication and utility bills are mostly not reported to the credit bureaus, despite the ability of current credit scoring models to leverage this data. Credit standards have also tightened considerably since the 2008 crisis, resulting in prospective black homebuyers being left without financing options.
Going forward, lenders should consider implementing underwriting criteria that more fully and equitably assess an applicants’ homeowning potential.