Home equity is the portion of your home's value that you've paid off and own versus the amount you've borrowed and still owe on the mortgage. It’s a significant contributor to overall wealth creation, particularly for people who don't have the means to invest in other asses. The unevenness of home equity holdings across ethnic groups contributes to the racial homeownership gap between White and Black households in the United States.
- Home equity can contribute to both wealth building and wealth loss.
- Low Black homeownership rates and home values are probable contributing factors to the Black/White wealth gap.
- Other contributing factors to the racial homeownership gap include ripples from historical enforcement of discriminatory codes and deeds, appraisal and lending practices, and supply shortages that lead to a lack of affordable, accessible housing.
- Solutions are complicated and should take into account the multiple variables involved in home equity disparities.
- Solving the homeownership or home equity gap is unlikely to resolve the racial wealth gap entirely.
Why Home Equity Matters for Building Wealth
Wealth is represented by the assets someone owns minus any debts or other obligations they owe. A homeowner's home equity or their share of the home’s overall value increases as they pay down their mortgage. Homeowners can also build equity by increasing the home’s value with improvements, or by just waiting as the value of real estate in the region appreciates and increases.
"For most Americans, homeownership is the number one asset through which wealth is derived," according to Andre Perry, Senior Fellow at the Brookings Institution, a progressive nonprofit public policy organization based in Washington, D.C.
Homeowner wealth can provide a source of stability in life if other financial factors go awry, such as due to job loss. It can make a home equity line of credit possible or result in ownership of an asset that can be sold. Homeowner wealth can also be passed down through generations. Older Americans can access the wealth that's “stored” in their homes for retirement or to make home improvements.
"Homeownership is a massive driver of household wealth, so you can't have a conversation about closing the racial equity gap that doesn't focus on housing," said Andy Winkler, Housing and Infrastructure Projects Director at the Bipartisan Policy Center, a nonprofit policy organization. "But while it's a primary driver of wealth, it can also be responsible for losing wealth."
Many homeowners found themselves upside down or underwater on their mortgages after the financial crisis in 2007. They owed more on their homes than the properties were worth. Black and Latino homeowners lost their homes at almost twice the rate of White homeowners between 2007 and 2009, a contributing factor to the racial homeownership gap.
Homeownership and the Racial Wealth Gap
Homeownership is an important component of wealth building for all communities, but there are uneven outcomes for home equity when it comes to White and Black homeowners. The net worth of a typical White family is eight times greater than that of a Black family by one measure.
There's a 30-point gap between Black and White homeownership rates, which has huge implications for wealth. The Black/White homeowner’s gap has widened since 1900, according to research from real estate site Zillow. A broad bipartisan awareness of the challenges exists, and the evidence of disparity is clear. There's a persistent and massive gap, and we haven't made any real progress since civil rights legislation was passed in the 1960s.
The Urban Institute notes a child’s likelihood of being a homeowner increases 8.4 percentage points when their parents are homeowners. But only 48% of Black parents are homeowners while 84% of White parents are homeowners.
Homeownership and wealth are correlated, but homeownership and non-homeownership alone don't cause inequity, said William A. Darity, Jr., Samuel DuBois Cook Professor of Public Policy, African and African American Studies, and Economics at Duke University. Homeownership is just one component of wealth.
Other assets contributing to wealth can include business equity, CDs, IRAs, other property, 401(k) plans, and liquid assets such as checking and savings accounts. The disparity between the liquid assets of Black and White individuals means Black households have less of a cushion when they're under economic stress, such as after an unexpected job loss or during a health crisis.
Why Is There a Racial Homeownership Gap?
Perry says that our mortgage, appraisal, and lending practices are the real estate behaviors that contribute to lower home values, and this results in lesser wealth for Black families. Many practices are rooted in historical laws and policies that still influence the situation.
Court-Enforced Segregated Housing
Federal, state, and municipal government policies have provided race-based beneficial treatment for White homeowners throughout the nation's history while intentionally excluding Black individuals from homeownership in many neighborhoods. This has sustained segregation. Court-enforced city zoning and land-title covenants can prevent selling or renting certain homes to Black individuals or families. Lending institutions have limited Black purchasing power.
Some cities have used zoning ordinances to prevent Black and other non-White people from purchasing homes or moving into neighborhoods with only White residents. But a 1926 Supreme Court decision ruled that states couldn't enforce race-based zoning ordinances.
The Supreme Court has nonetheless allowed the enforcement of deeds containing discriminatory covenants regarding race, ethnicity, or religion. White homebuyers were restricted from selling, leasing, renting, or even giving property to someone of a specific ethnic or racial group under the terms of these deeds and covenants.
One of the first associations for professional real estate brokers promoted racial covenants. The National Association of Real Estate Boards (NAREB) and the U.S. Department of Commerce created a model racial covenant in 1927 that was adopted across the nation by home sellers. It prohibited Black people from using or occupying a home unless they were living in the home as a janitor, chauffeur, or house servant.
Restrictions could be renewed through various means, ensuring that Black homebuyers across the U.S. were shut out for decades in many cases. Washington, D.C., homeowners in neighborhoods with only White residents signed 21-year agreements via neighborhood associations that effectively prevented Black people from buying on certain streets in the 1920s. Neighbors could file suit if a homeowner tried to sell to a Black buyer.
The Supreme Court ruled in 1948 that state courts could not enforce racial covenants, but they were still written into deeds until the 1968 Civil Rights Act made racial covenants illegal. Segregation still often exists in neighborhoods where deeds were once implemented. The population remains 73% to 90% White in Minneapolis neighborhoods where racial covenants were common.
Black homeowners have more mortgage debt than White homeowners relative to their home’s value, according to the Urban Institute, and this leads to reduced equity.
High interest rates and the difficulty of saving for a down payment can make it difficult to build home equity, if a homebuyer can obtain a mortgage at all. And Black communities have long borne the brunt of discriminatory lending policies. Government lending maps and underwriting standards show that primarily White homeowners benefited from Federal Housing Administration home loan guarantees until the 1968 Fair Housing Act forbade unequal credit access or terms based on race.
Banks can consider an applicant’s credit history and income and a house’s condition, use, or design when deciding whether to lend for a mortgage, but they can’t use discriminatory factors, including race. Black mortgage applicants are disproportionately likely to have thin credit histories and no credit scores. The Urban Institute notes that most Black households pay rent, which isn’t usually reported to credit bureaus even if these payments are always made on time.
Some Black housing-related equity loss is related to Black households being steered toward riskier subprime loans during the housing bubble. The American Enterprise Institute (AEI) notes that the federal government’s mortgage-lending policies increase buyer leverage or the amount of the purchase paid for by borrowing, which often leads to higher prices and potential default.
These circumstances have been established in part through a process called "redlining," the denial of housing loans in certain areas due to racial factors even though the applicant qualifies for the loan.
Loan originators used lists of people who were already borrowing money to buy consumer goods in Black and Latino neighborhoods during the subprime loan crisis. They exploited community or religious connections to gain trust, then placed these borrowers into higher-cost, higher-risk loans than similar White borrowers. Wells Fargo Bank was found to have steered Black and Latino loan applicants toward higher-priced loans.
Segregation has led to decreased home values, limiting the equity that a Black homeowner can build. A Brookings Institution report found that in the average U.S. metropolitan area, homes in 50% of Black neighborhoods are valued at about half the price of homes in communities without Black residents.
Perry's research found that after excluding variables such as education, crime, and walkability, homes in Black-majority neighborhoods are priced approximately 23% or $48,000 lower on average than comparative homes in areas with less than a 1% Black population.
The lower cost of housing can benefit renters and homebuyers in the short term, but the lack of equity growth can hamper refinancing for renovations over time. It affects earning equity as the overall market rises, selling at a higher price, or investing money that's going to mortgage payments toward establishing a business or furthering education instead.
NAREB's code of ethics required brokers to practice racial steering or they would risk expulsion or license revocation as early as 1924. This was changed in 1950, but non-White homebuyers continue to face discrimination when searching for and securing a home, Winkler said. They may be shown fewer housing options, guided to particular neighborhoods, or led to higher-cost mortgage products. This can lead to continued segregation and the racial homeownership gap.
Effect of Appraisals
An appraisal is an informed opinion of a home's market value. It's intended to provide a lender with an accurate assessment of the property and the loan. An appraisal relies on an evaluation of the house along with a comparison to similar homes in an area that have recently sold. But subjective factors also come into play, which may matter when Black appraisers only make up 2% of the profession.
Appraisers' opinions of value are more likely to fall below the contract price in Black and Latino census tracts, according to a September 2021 Freddie Mac study. And the extent of the gap increases as the percentage of Black or Latino people in the tract increases.
The American Enterprise Institute disputes Freddie Mac’s conclusions. It states that based on its own data analysis, the appraisal gap is the result of would-be first-time buyer inexperience, socio-economic status (SES), or government actions, particularly a concentration of FHA lending in certain census tracts, with a disparate impact on protected classes.
House prices often rise faster overall than incomes, even as some neighborhoods struggle to hold on to housing value. This makes it more difficult for first-time or first-generation homebuyers to break into the market and gain equity. Most residential land in major U.S. cities is zoned exclusively for single unit detached homes. This originally occurred as part of a federal effort beginning in 1921 to price Black people and Southern and Central European immigrants out of newly built areas.
Housing prices are up 28% in many areas since the pandemic began, with sought-after neighborhoods and communities even seeing a doubling in value, Winkler said. It can be even more challenging to build up the down payment without inheriting wealth from previous generations and when relying solely on wages. Black workers earn less than White workers, but they're more likely to spend more on student loan payments and rent than other racial groups.
The American Enterprise Institute also points to historic single unit zoning policies that created dual outcomes, such as racially segregated neighborhoods and an artificial supply shortage restricting new construction in many cities. Home supply is at its lowest level on record, and it's even lower for lesser priced entry-level homes, according to the Institute's testimony before Congress.
Possibilities for Closing the Racial Homeownership Gap
Down payment assistance and fund matching programs can help first-time buyers who don't have access to intergenerational wealth, and Black homebuyers in particular. These private or public programs can help renters as they save to enter the real estate market. They can help make up for the lack of down payment assistance that some receive due to intergenerational wealth advantages.
Some government and private entities have created or are discussing housing-focused reparations initiatives. These reparations would assist low- and moderate-income Black residents to become homeowners if their families experienced past housing discrimination due to ordinances or policies.
Expanding and Improving Mortgages
Expanding credit access and altering lending terms could help Black homeowners accrue equity faster. The Urban Institute has suggested creating refinancing options to lower mortgage interest rates and broadening credit scoring measures. A November 2021 Freddie Mac initiative encourages landlords to report on-time rental payments to the three major credit bureaus.
Congress is hoping to shift terms, too. The Low-Income First-Time Homebuyers (LIFT) Act was introduced by Senator Mark Warner in September 2021 to help first-time, first-generation homebuyers grow equity twice as fast by offering a 20-year mortgage for roughly the same monthly payment as a traditional 30-year loan. This idea has broad appeal politically.
President Biden created an initiative to address home appraisal inequity in June 2021, using federal agencies to find and change discriminatory patterns within appraisal and homebuying systems. A Fannie Mae Appraiser Update suggested avoiding subjective value-laden terms such as "desirable," "crime-ridden," "affordable," or "integrated" in June 2021, and to instead stick to facts such as the neighborhood amenities, crime statistics, and the property.
The Valuing Homes in Black Communities Project, a collaboration between Brookings Institution and Ashoka, challenges organizations to develop workable solutions for Black housing devaluation. This might include new loan products, credit scoring systems, tax credits, microloans to homeowners, or developing commercial corridors near Black neighborhoods.
The Appraiser Diversity Initiative hopes to create paths for underrepresented individuals to begin appraisal careers and address bias, while also addressing devaluation within appraisal systems.
Some critics point out that credit expansion and down payment assistance programs could work at cross purposes when there aren't homes for sale. This could end up driving prices higher, Winkler said. Some such as AEI suggest increasing supply through easing land-use restrictions and zoning for this reason, such as making it legal to have both two- to four-unit and single family attached housing in one-unit single family detached housing neighborhoods.
The Bottom Line
“I don't think encouraging Black homeownership is a prudent way to try to close the racial homeownership gap,” said economist Glenn Loury at Brown University via email with The Balance. Loury isn’t against encouraging Black homeownership, but he said that the 2007-2008 collapse showed how promoting loans to gain assets can lead to people ending up worse off than before.
Loury noted that he’s not an advocate of reparations, but he prefers a more straightforward approach if reparations are being promoted to narrow wealth disparities. "If you want people to have more wealth, give them money and let them decide what to do with it.”
Darity supports reparations and feels that simplistic homeownership solutions (and avoiding structural issues) will likely fall short compared to offering reparations for past discrimination. These reparations could be invested as the individual chooses, coupled with an aggressive government campaign against housing and lending discrimination.
Homeowning isn’t the only way to build wealth, Perry noted. Business ownership, stock market investing, and other investments contribute, too. "Listen to Black homeowners and residents of Black communities,” Perry said. “They've been saying they've been robbed of equity for generations, and no one has listened. Policymakers haven't acted on those calls."
Frequently Asked Questions (FAQs)
What is the Black/White wealth gap in America?
The Black/White wealth gap in America measures the difference between the value of assets owned by White individuals and families and those owned by Black individuals and families. This gap can be measured in one of two ways: median and average. The median is frequently cited as the "middle household" within the data, which tends to underemphasize the extremes of wealth. The average includes the highest and lowest wealth holders, and extremes on either side can shift the results.
Why is the wealth gap increasing?
The ratio of White family wealth to Black family wealth is higher than it was in 2000, according to the Brookings Institution. Many factors contribute, but economic downturns are significant. Median net worth declined more for Black families by 44% than for White families at 26% from 2007 to 2013. These disparities may be further exacerbated by the COVID-19 pandemic, which has had a particularly hard impact on Black families.