The emotional intensity attached to the idea that homeownership is the best way to build wealth and fix the racial wealth gap can be ferocious. Mechele Dickerson, a professor at the University of Texas at Austin School of Law and author of Homeownership and America’s Financial Underclass: Flawed Premises, Broken Promises, New Prescriptions, recalls many occasions when she faced strong reactions for suggesting that we acknowledge that decades of promoting homeownership hasn’t helped close the racial wealth gap. She recalls being “ripped to shreds” at one event in North Carolina that was full of homeownership advocates, and “literally snarled at” through an hourlong speech at an alumni event. “I didn’t like to give talks over lunch because somebody can be hurling a tomato or a knife or something,” she jokes.
When we talk about asset-building, homeownership is typically assumed to be the primary means of achieving it. Over and over we hear (including in the pages of Shelterforce), “Homeownership is the best way to build wealth,” as if it is a universal truth. And the conclusion that usually follows hard on that assumption is that closing the racial homeownership gap will therefore close the racial wealth gap—or at least make big strides in that direction.
Often this perspective is promoted by well-meaning people with privilege for whom homeownership did result in a large increase in wealth. Or by those looking at the results for white homeowners whose intergenerational home-equity journey benefited from government support and opportunity hoarding in the mid-20th century. Or by people of color, who, by seeking homeownership are (understandably and rightfully) seeking self-determination and access to something to which they have been wrongfully denied, and are hoping it will fix other problems, like the wealth gap, as well.
Reality is a little more complicated. It’s obviously true that many people who have bought homes end up with more wealth than they had before they purchased their house.
But we shouldn’t assume that because homeownership has been correlated with a significant increase in wealth for white households that the same level of homeownership will produce even the same levels of return for Black households, let alone allow them to catch up. That skips over a lot of things about how both housing markets and structural racism work.
Is Homeownership the Wealth Gap Driver?
“The word ‘drive’ suggests a causal link between homeownership/home equity and intergenerational wealth,” write seven leading scholars on racial equity in the report What We Get Wrong About Closing the Racial Wealth Gap. “However, a major flaw in this reasoning is that, by definition, homeownership/home equity is a component of wealth. Hence, the statement that ‘homeownership drives wealth’ is equivalent to saying that ‘wealth drives wealth.’”
The authors go on to show that the data “simply does not support the claim that the racial homeownership gap explains the racial wealth gap.” For example, white households that are not homeowners hold 31 times more wealth than Black households that are not, according to the report, while white households that own homes have nearly $140,000 more in net worth than Black homeowning households. “While the wealth ratio between whites and Blacks may narrow somewhat among those who own a home,” the report concludes, “a six-figure wealth differential remains. Clearly increased homeownership is far from sufficient to close the racial wealth gap.”
A fascinating tool from the Urban Institute can help us see that the difference in homeownership rates is only part of the story. For a given metro area the tool will show the disparities in home equity by race—and then break down the difference in homeownership rates and the difference in average housing values. (Remember that home equity disparities are likely to be smaller than the total racial wealth gap for an area, since white households tend to have a higher percentage of non-home-equity wealth.)
Using the tool we find that, for example, in Chicago, Latinx households have a homeownership rate that is slightly above the city’s average (though still below that of white households). However, their average home value is only 74 percent of the city average, and 60 percent of the average white homeowner’s home, and so their total home equity is still lower.
In Atlanta, Georgia, Black households make up 44.3 percent of the city’s total households but own only 17.4 percent of the housing wealth. This can’t be explained only by their homeownership rate, which is only 12.2 percentage points lower than the city average. Having an average home value of not much more than half the city average is required to explain the rest.
Appreciation of housing values is neither guaranteed and predictable, like interest, nor race-neutral in its unpredictability, like the value of stocks. As The Color of Law’s Richard Rothstein has said, “a home is one of the only assets in which the race of the owner affects the rate of return.”
The entire process of using homeownership to build wealth, even when it is somewhat successful, continues to be both actively biased by race and indirectly biased by the preexisting racial wealth gap.
Here are some of the many ways in which race affects the relationship between owning a home and getting financial benefit from it.
How Much You Pay for the Same House
Current discrimination, the history of racism that has accumulated into things like credit scores, and the existing racial wealth gap, which makes it harder to access larger downpayments, all affect what kind of loan you get, making it much more likely that BIPOC homebuyers will end up with higher interest rate mortgages and more debt. Raheem Hanifa from the Joint Center for Housing Studies at Harvard found last year that not only are Black homebuyers charged higher interest rates than similar income white homebuyers, but higher-income Black homebuyers also receive higher interest rates than lower-income white homebuyers. Paying higher interest rates and additional fees for mortgage insurance makes buying the same house more expensive.
Property taxes and insurance are the other major components of a homeowner’s monthly payment, and both can also be affected by race. Insurance redlining can mean paying more for homeowners’ insurance, having trouble getting policies, or having difficulty getting claims paid. And in some places, notably Chicago, homes in Black neighborhoods have been found to be overassessed for the purposes of property taxes, leading to higher bills, even while they were underassessed in terms of market appraisals.
There is also a racial difference in who accesses refinancing loans when rates drop, increasing the relative average cost of homeownership for homeowners of color. The share of refinance loans going to homeowners of color has, in fact, been falling. This is at least in part due to disparate approval rates. Wells Fargo actually approved fewer than half of Black homeowners’ refinance applications in 2020, while approving 72 percent of applications from white homeowners. (Editor’s note: Wells Fargo provides financial support for some of our work.)
There can be additional hidden costs to paying more to own the same house. For one, it limits where homebuyers of color can afford to buy, which can keep parents from moving to places with better educational opportunities. “I recommend that people of color who are parents—who can’t afford to buy the home that they want in the neighborhood where their children will be zoned to a high performing school—rent,” says Dickerson. “Spend the 18 years of your child’s life finding a rental in a neighborhood where the schools are zoned for higher performing schools than wherever the places are you could afford to buy a home. Housing choice affects educational outcomes.”
How Much Your Home Might Appreciate
Next there’s the question of whether your home is likely to appreciate, and by how much. Due to the well-documented history of segregation, ongoing bias on the part of many real estate agents, and the fact that many Black households would like to stay in their existing communities and/or don’t feel safe in predominantly white neighborhoods, many Black and Latinx homebuyers are purchasing homes in neighborhoods with a high percentage of Black or Latinx residents.
Outside of a racist society, this result would not be an inherent problem. However, we are not outside of a racist society, and so it hampers appreciation in several ways. First, the history of segregation not only forcibly created Black and Latinx neighborhoods and set their starting values very low, but it put them in undesirable locations. As Spencer Cowan, director of research for the Woodstock Institute, explains in a not-yet-published report, properties in those neighborhoods “started with lower values, and so even if they appreciated at the same rate as properties in the neighborhoods that governments reserved for whites only, they would still be less valuable than properties in those white neighborhoods.”
But, Cowan adds, “in fact, properties in minority neighborhoods are unlikely to have appreciated at the same rate as properties in white neighborhoods for a few reasons.” He lists three: (1) Residents having less wealth than their white counterparts because of the racial wealth gap, and so having fewer resources to maintain and upgrade their properties. (2) Those areas being more likely to be sited in places affected by natural hazards, such as floodplains, or adjacent to undesirable land uses such as slaughterhouses or landfills. (3) And finally, the ongoing lack of political clout in those areas allowing governments to continue to disproportionately put locally undesirable land uses, such as industrial sites or highways, in them. “It’s not good for your health to try to hold on to an asset that won’t appreciate, and locks up all of your capital,” he says.
But the costs to getting in and out of homeownership are high, and so owning a home that hasn’t appreciated, or might have even lost value, can make it harder to move out of a place that isn’t serving your family.
In addition to those issues there is active appraisal bias. This encompasses high-profile examples of individual bias in which changing the hues in the family photographs changes the appraisal. But also within a majority Black neighborhood, you don’t need your individual appraiser to be biased in order for the bias applied to other homes in your neighborhood to affect your value via comps.
And finally, as David Imbroscio explores, there’s the way the market itself reflects the values of a racist society. Even with all the government policies removed, if non-Black homebuyers don’t want to buy in majority Black areas, that will lower prices there. As Dorothy Brown, author of The Whiteness of Wealth, wrote in The New York Times last year:
Black Americans are often unable to build wealth from homeownership in the same way their white peers are, in large part because home prices are generally set by the people who make up the majority of buyers: white Americans. White families typically prefer to live in predominantly white neighborhoods with very few or no Black neighbors. Homes in these neighborhoods tend to have the highest market values because most prospective purchasers—who happen to be white—find them most desirable.
Black Americans, on the other hand, tend to prefer to live in racially diverse or all-Black neighborhoods. Research has shown that once more than 10 percent of your neighbors are Black, the value of your home declines. As the percentage of Black neighbors increases, the property’s value plummets even further.
Or, as Dickerson puts it succinctly, while redlining might be illegal, “One thing that is still legal is choosing not to live there. Too many nonwhite-looking people show up in the schools, folks leave.”
This may eventually change, but as one financial adviser noted to prospective Black homeowners, “Your assets need to mature on your timeline and not be overly dependent on the timeline of social progress.”
Can You Keep It Long Enough?
Even when a home does appreciate, to reap the gains of appreciation, homeowners must be able to stick it out until the right moment to take advantage of it. With an amortizing loan, your first many years of payments are nearly entirely interest. And transaction costs, both entering and leaving, are high. As many people working in the shared-equity homeownership space have pointed out, homeowners realize very little wealth gains from homeownership unless they are able to sustain homeownership for at least five years. Again, this means those with other forms of wealth, higher income, and job flexibility, who can then weather things like ups and downs of the market, major repairs, job loss, and property tax changes, also have a better shot at building wealth through home equity. Data shows that Black homeowners are less likely to sustain homeownership long enough to benefit.
For example, without the ability to cover increasing property taxes, it is difficult to keep a home in a gentrifying area long enough to take full advantage of rising prices, especially if you must make a sale under duress. Existing homeowners who actually benefit from their neighborhood gentrifying are “unicorns,” says Dickerson. “Someone always has like an aunt or cousin, right, where this worked out really well for them. And I’m like, you know, ‘God bless your aunt or cousin. They’re a unicorn.’” In most Black and Latinx neighborhoods there just aren’t that many longtime homeowners to begin with, she says, and many of the ones who are there are targeted by predatory home-equity loans or purchasers who offer them far less than their homes are worth. Yes, they get more than they would have if prices hadn’t risen, she says, “but not as much as they should have.”
Racial differences in factors like unemployment, COVID-19 and medical debt, and access to property tax relief or foreclosure prevention help can increase the risk of foreclosure. As we saw in the Great Recession, racially targeted predatory home-equity lending stole a lot of housing wealth that households of color had managed to build.
The cost of maintaining a home also plays into sustainability. Starting with less wealth and buying in a previously segregated area can lead to a higher likelihood that a buyer will end up with a home in poor condition, or perhaps one with poorer underlying construction, to start with. And then being lower income and having a higher housing cost burden due to unfair lending practices can hamper a homeowner’s ability to afford regular maintenance and quick and full repairs.
Code violations are a constant danger for lower-income homeowners with older houses, and complaint-driven systems often allow for racist harassment. “Like many powerful tools, code enforcement often reflects the values and goals of those that wield it,” wrote Cities for Responsible Investment and Strategic Enforcement in a report on how to make code enforcement more equitable. “It can be used to intentionally or inadvertently target, penalize, and displace vulnerable populations, particularly low-income, immigrant, and other communities of color.”
Increased rates of foreclosure don’t just fail to close the racial wealth gap; they can widen it. Losing a home is expensive, as the Joint Center for Housing Studies notes: “Owners who default on their mortgage will not only lose whatever equity stake they had in the home, they are also likely to deplete their savings in a bid to maintain ownership and suffer significant damage to their credit history making it difficult and costly to obtain credit for several years to come.”
Since homeowners of color are more likely to sell at a loss, tax policy adds insult (or really additional injury) to injury: home appreciation receives more favorable tax treatment than home depreciation, leading to racially unequal outcomes. Dorothy Brown, again:
“Today, if you sell your home at a gain, you can receive up to $500,000 of gain tax-free. If, however, you sell your home at a loss, you get no tax break. (Contrast that with the way the tax law allows losses to be deductible when you sell stock.) . . .
So even though it is now illegal to discriminate against Black homebuyers, tax subsidies that reward homeowners who sell their homes at a gain and punish those who sell their homes at a loss still disproportionately benefit white homeowners and their preferences—helping far too few Black homeowners along the way.”
What does all this mean? A review of whether homeownership increases wealth for low-income households by the Joint Center for Housing Studies found that on average it does—but it only increases Black homeowners’ wealth somewhere between two-thirds and four-fifths as much as the total population.
That might help individual homeowners, but it’s not going to close the racial wealth gap.
Meanwhile, with lower rates of homeownership, Black households are disproportionately likely to be renters and therefore harmed by the rising property values that are generating that wealth for homeowners. “Developing more affordable rental housing in healthy communities with access to good schools and amenities is part of shrinking the racial wealth gap,” says Dickerson.
What Do We Do?
I draw three conclusions from looking at the assembled ways in which Black households are at a disadvantage when it comes to benefiting financially from owning a home.
First, much more emphasis should be put on approaches other than homeownership when it comes to fixing the racial wealth gap. As Anne Price and Jeremie Greer wrote earlier in this series, those strategies should be systemwide, not focused on individuals, and should end extractive practices as well as give better, fairer access to asset-building practices. And we also just need to make up the difference. Proposals like baby bonds, student debt cancellation, and forms of reparations are what it is going to take.
This doesn’t mean that work to provide access to homeownership should cease, just that it should not be seen as a sufficient answer. “Typically we hear that homeownership is the way to build wealth,” says Dickerson. “We should be saying it’s a way.”
Second, when we do talk about homeownership, rather than primarily talking about increasing access to it, we need to put equal emphasis on making the entire process of homeownership more equitable. Change the appraisal process, or better yet, deemphasize or get rid of appraisals. Fix the myriad structural problems that render the tax code, tax assessments, underwriting processes, credit scores, and code violations inequitable. Support environmental justice work, educational equity, and development without displacement that can reduce some of the actual differences in quality of life between neighborhoods.
Adjust the programs by which we support homebuyers and homeowners of color to recognize these realities, account for them, and make sure homebuyers understand them. All homebuyers, but especially those of color, Dickerson says, should be “going in with their eyes open.”
And finally, and I’ve said this before, we need to stop accepting how much our collective financial stability is based on housing appreciation, because it skews our incentives and our housing market. If we had a safety net composed of things like baby bonds, universal health care, better retirement plans, universal basic income, and community ownership of land and wealth-generating institutions, then home values could play a smaller, more optional role in financial well-being. And that, in and of itself, would be one major step toward a smaller racial wealth gap.
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