What explains the homeownership gap between black and white young adults?
Our recent report on millennial homeownership found that today’s young adults are less likely to be homeowners than prior generations at the same age. We also found persistent racial and ethnic disparities in the homeownership rate among millennials.
Between 1999 and 2015, white young adults ages 18 to 34 had the highest homeownership rate of any racial or ethnic group, at 42 percent, while only 18 percent of black young adults were homeowners. Our new study quantifies how parental wealth and homeownership contributes to this 24 percentage-point gap.
Twelve percent of the black-white gap is explained by parental homeownership and wealth
Having wealthy parents who are homeowners significantly increases a young adult’s likelihood of owning a home. Our analysis finds that parental homeownership alone increases a young adult’s homeownership propensity 7 or 8 percentage points. This reflects the fact that parents who are owners can communicate the advantages of homeownership and often help their adult children navigate house purchase and financing.
We found that a 10 percent increase in parental wealth increases a young adult’s likelihood of owning a home by 0.15 to 0.20 percentage points. So if two sets of parents are identical in all relevant factors and one set has $260,000 in wealth and the other has $200,000, the child of the wealthier family will have a 5 or 6 percent greater chance of owning a home than the child of the less wealthy family. Research shows that adult children of wealthier families get financial support with their down payments from their family.
This affects the racial homeownership gap because the homeownership rate for black parents is 35 percentage points below their white counterparts (49 versus 84 percent) and their median wealth is 15 times smaller ($14,400 versus $215,000). Via a regression analysis, we determined that parental wealth and homeownership explain 12 percent of the 24 percentage-point gap in the black-white young adult homeownership rate, which is about 3 percentage points.
Homeownership stability matters as well
Our regression analysis also finds that parents who were stable homeowners were more likely to have adult children who are homeowners. Young adults with parents who remained owners during the entire sample period from 1999 to 2015 are statistically more likely to be homeowners than young adults whose parents were renters the entire period. The children of parents who switched between owning and renting do not have a statistically higher likelihood of owning compared with those whose parents never owned a home.
This affects the racial homeownership gap as well. Not only are black parents less likely to own, they are also less likely to remain homeowners. Among white parents, 72 percent remained homeowners from 1999 to 2015, compared with 31 percent of black parents. Black parents are more likely to move in and out of homeownership, which weakens the impact of parents’ homeownership status on their child’s likelihood of homeownership.
The amount of wealth matters
We classify parents’ wealth in three groups to examine whether there is a threshold for parental wealth’s impact on a young adults’ homeownership:
- Those with wealth less than $100,000
- Those with wealth between $100,000 and $200,000
- Those with wealth greater than $200,000.
While there is evidence that wealthier parents are more likely to provide down payment assistance to their children, parents may need to have a certain amount of wealth to financially support their child’s homeownership.
Our analysis shows that young adults whose parents have wealth greater than $200,000 are significantly more likely to be homeowners than those whose parents have less than $100,000. But young adults with parental wealth between $100,000 and $200,000 are no more likely to own a home than those with parental wealth below $100,000. The middle level of wealth may not be enough to allow parents to help elevate their adult children into homeownership.
This factor also affects the racial homeownership gap because more white parents are in the higher wealth category: 51 percent of white parents have wealth above $200,000, compared with just 10 percent of black parents.
Our research finds that parental homeownership and wealth have a quantifiable impact on a young adult’s tenure choices and on the homeownership gap between black and white young adults. The greater wealth, higher homeownership rates, and more consistent homeownership record of older white adults, as well as the enormous drop in home values following the 2007 housing market crisis experienced by a generation of older black adults, all contribute to the continued and growing homeownership gap between black and white young adults.
Homeownership remains one of the most widely available and effective ways to build wealth and increase prosperity. Our work shows how the loss of homeownership and wealth can magnify over generations. In our report, we offer more details on three ideas policymakers should consider to help counter the increasing racial homeownership and wealth gap:
- Improve young adults’ understanding of accessing homeownership
- Introduce a tax-free account to save for a down payment
- Expand the credit box in a prudent manner to allow more creditworthy borrowers to qualify.
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