Orphe Divounguy On the Economy: Housing disparities widened during the pandemic. And that expanded the wealth gap, too.
Nationally, fewer than half of all Blacks own their home compared to more than 70% of white households. The racial and ethnic gaps in homeownership were wide even before COVID-19 and the pandemic surge in house prices and rents only expanded the gulf. According to research published by the National Association of Realtors, the Black homeownership rate in the United States is lower today than it was a decade ago.
Unfortunately, the pandemic buying frenzy meant that prospective Black buyers—who earn less on average than other Americans and have less access to credit—struggled to keep up with bidding wars associated with quickly rising house prices. All told, homeownership increased for all races during the pandemic, but Black homeownership grew more slowly than it did for white households.
There are many reasons Black renters face huge obstacles on the road to homeownership. First, Blacks disproportionately live closer to cities, where rents tend to be higher. What’s more, research from Zillow shows that minority renters also face higher upfront costs—from submitting a higher number of applications and being rejected more often to paying higher security deposits. The disproportionately higher costs associated with renting lengthen the time it takes to save for a down payment. Perhaps as a result, Black mortgage applicants also tend to make smaller down payments when applying for a loan—a median of 3.5%, less than half the overall median down payment of 8.9%.
Then, there’s access to credit. More than 50% of white households have a FICO credit score above 700 compared to only 21% of Black households, according to research by the Urban Institute. Finally, Black mortgage applicants are denied 84% more often than white borrowers are, according to data from the Home Mortgage Disclosure Act, with poor or nonexistent credit history being the most commonly cited reason for the denial. Mortgage denial rates among Black applicants increased by 10 percentage points during the pandemic.
Research also shows that even after accounting for income, credit, and loan-to-value and debt-to-income ratios associated with a mortgage application, Black mortgage applicants experience different processing times and worse outcomes than similar whites. Black applicants are 2.9 percentage points more likely to have their mortgage application denied relative to similar white applicants.
Rising housing costs disproportionately affect low-income households and minorities contributing to higher wealth inequality. And the resulting increase in the wealth gap drags down U.S. economic growth. That means lower living standards for everyone, not just those who are left behind. This is because stable housing is linked to better health, more private and public investments, higher labor supply and local employment.
New research published by the Federal Reserve Bank of San Francisco reveals that children whose parents extract equity from their home are 60% more likely to become a homeowner than children whose homeowner parents are not able to extract equity from their home. Unfortunately, a history of discriminatory housing practices led to land loss and lower housing values for Blacks, and that often means less home equity for those who still managed to get on the homeownership ladder, limiting the opportunities for their children as well.
From paying higher rent costs, having less access to credit or being less likely to get parental help for a down payment, the odds are stacked up against Black families. However, when comparing U.S. metropolitan statistical areas, Black households tend to have a higher homeownership rate in areas that build more housing. This makes sense. House prices tend to grow faster and affordability can more easily get out of reach in areas where building new housing is constrained by nature—such as lakes and mountains—or by land use and building regulations.
While not much can be done about a lack of developable land in some areas, loosening single-family zoning restrictions—which prevent homes from being built—could yield millions of additional homes and go a long way to lower housing costs, reduce race and ethnic wealth inequality and boost U.S. economic prospects.
Crain’s contributor Orphe Divounguy is a senior economist at ZillowGroup and former chief economist at the Illinois Policy Institute. The views presented here do not necessarily reflect the views of his employers.
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August 31, 2022 at 07:02AM