Home Equity and the Racial Wealth Gap

How Government Housing Policy Deepened the Racial Wealth Gap

Black couple taping boxes

Photo by Roberto Westbrook / Getty Images 

The racial wealth gap is the disparity in median household wealth between the different races. Home equity is a large percentage of most families’ wealth. As a result, increasing minority homeownership is critical to closing the gap.

Where did the gap come from? A century of government policies to promote home equity was combined with racial discrimination in home ownership. The result is a homeownership gap that overlaps the racial wealth gap in America.

A 2016 Demos report stated that reducing the racial homeownership gap would narrow the racial wealth gap by 31%. The advantage over other methods is that it doesn’t place the responsibility of Black people to correct structural inequality. Financial literacy, education, and entrepreneurship are useful skills but won't build wealth unless minority home ownership is increased.

How important is home equity to building wealth? In 2017, renters’ median net worth was only $3,036, according to the U.S. Census Bureau. Homeowners’ net worth was $269,100. Of that, home equity made up $160,100. The rest was in other investments like retirement accounts.

Similarly, non-Hispanic whites’ net worth was $171,700. Black people only owned $9,567 per household. A big reason is that whites were more likely to be homeowners. The Census survey found that 74.5% of non-Hispanic whites owned equity in their own home in the fourth quarter of 2020. That's compared to 44.1% of Blacks, 49.1% of Hispanics, and 59.5% of Asians.

Why Home Equity Works So Well to Build Wealth

The federal government subsidizes home equity in ways not available to other forms of wealth building. For example, home buyers only have to put 20% down. The bank finances the rest, at a low-interest rate and over 30 years. Imagine a bank providing that kind of loan for any other investment. Banks are willing to offer such good terms because the federal government guarantees the loan.

The government also provides tax advantages. Homeowners can deduct the mortgage interest and property taxes from their income.

Homeowners don’t have to pay taxes on the capital gains from selling their home in most instances. Instead, they can exclude capital gains from taxable income. They must have owned and lived in the house for two of the five years before the sale. For singles, up to $250,000 of capital gains is tax-free. For marrieds filing a joint return, the tax-free amount is $500,000. 

The government promotes wealth building through homeownership over generations. Inheriting a home provides additional tax advantages. Children only pay taxes when they sell the home. Even then, the capital gain is calculated using the difference between the sale price and what the home was worth when the parents died. All the gain incurred while parents lived it is not taxed.

There is another reason home equity works in building wealth. Meeting monthly mortgage payment forces many homeowners to save and invest. Even though the rent bill must also be paid, it adds nothing to a family’s wealth.

How Federal Policies to Promote Home Equity Excluded Blacks

The U.S. government has a history of promoting homeownership for whites that excluded Blacks. In his book, “The Color of Law,” Richard Rothstein went one step further. He argued that segregation was deliberately caused by government housing and lending policies. These laws created a structural inequality that's been difficult to erase.

From 1619 to 1865, the vast majority of Black people were enslaved. Until the 13th Amendment, they couldn't own property because they were considered to be property.

In 1862, Lincoln signed the Homestead Act. It gave federal land to anyone willing to farm it for at least five years. Most Black people were enslaved, and so they were not included. By 1900, settlers and speculators had gobbled up 80 million acres in Colorado, Kansas, Montana, Nebraska, and Wyoming.

After the Civil War, the federal government took a step forward in making reparations. Union General William Sherman asked leaders of the former Black slaves what they needed to build their lives. The leaders’ immediate response was, "Land."

Sherman had confiscated 400,000 acres in South Carolina and Florida belonging to former Confederate landowners. He ordered the land divided into 40-acre plots for 40,000 former slaves. President Lincoln signed a bill authorizing the Freedman's Bureau to execute the transfer.

But in 1866, President Andrew Johnson vetoed an extension of the Freedmen's Bureau. He ordered the land returned to its former owners. The government evicted Black families and forced them to sign labor contracts. This created the virtual slavery of sharecropping and indentured servitude.

At least 90% of American Black people remained in the South until after World War I. Many were illiterate because the separate school system meant their education was inferior to whites. In 1910, they were still not able to vote. These Jim Crow laws also kept Black individuals from owning property.

After World War I, the majority of the Black population moved north in the Great Migration. The war had slowed immigration from Europe, creating a labor shortage in the North. Companies began recruiting Black Southerners to work in their factories. Returning black veterans were open to a new way of life. By the 1970s, 47% of Black people lived in big cities in the North and West.

But northern white families also feared having Black people in their neighborhoods. They put restrictive covenants into their deeds. They outlawed Black people from buying, leasing, or living in properties in white neighborhoods. If that didn’t work, they resorted to violence. For example, by the 1920s, these covenants kept 85% of Chicago off-limits to Black people.

In 1913, Congress approved the mortgage interest deduction. It allowed homeowners to deduct interest payments from their mortgages. By reducing the cost of the loan, it allowed people to buy homes who otherwise couldn’t afford them.

The deduction also drove up home values. Homeowners use the money saved from the deduction to afford a larger home. A 1996 study estimated that eliminating the deduction would decrease home prices by 13% to 17%. By inflating home values, the MID benefited Americans who already own homes. But it also makes it more difficult for renters to afford their first home.

The MID helped higher-income families more than lower-income ones. Only families that earned enough to itemize their deductions could take advantage of it. As a result, households with at least six-figure incomes received more than four-fifths of the total value of mortgage interest and property tax deductions.

In 1933, the New Deal created many programs to help homeowners. But these programs excluded Black people. The Home Owners Refinancing Act established the Home Owners Loan Corporation. It refinanced mortgages to prevent foreclosures. By 1936, it had refinanced 1 million homes or 20% of all urban mortgages. This allowed families to keep their homes despite the Great Depression. But it gave minority neighborhoods low ratings, according to a study published in the American Economic Review. As a result, they couldn't take advantage of the programs.

In 1934, the National Housing Act established the Federal Housing Administration to insure mortgages. It used the HOLC ratings to exclude Black neighborhoods, a process known as redlining. Without insurance, banks wouldn’t lend to anyone in those neighborhoods, regardless of their credit scores. Between 1934 and 1968, 98% of home loans went to white families. 

The FHA also offered low-interest loans to builders. The loans required lot sizes, setbacks, and building materials that encouraged new construction in the cheaper land at the cities’ edges. The FHA prohibited loans to any new developments that included Black residents, according to Rothstein.

In 1937, the United States Housing Act funded state-run public housing projects for the inner cities. These constructed housing for middle-income and low-income workers. The Housing Act enabled racial segregation in housing projects. That lasted until 1968.

In 1944, the G.I. Bill guaranteed loans for veterans. The terms made monthly mortgage payments cheaper than rent in public housing. By 1955, veterans' home loans accounted for 20% of all new homes built after World War II. Between 1944 to 1971, the Veterans Administration spent $95 billion on benefits.

But the VA used FHA standards in dispensing loans. As a result, it excluded many Black veterans. Also, the states were given free rein to administer the program. Most of the VA boards were all-white. As a result, Black veterans in the South were denied access.

In his book, When Affirmative Action Was White, Ira Katznelson described the consequences, “By 1984, when G.I. Bill mortgages had mainly matured, the median white household had a net worth of $39,135. The comparable figure for Black households was only $3,397, or just 9% of white holdings. Most of this difference was accounted for by the absence of homeownership.”

The Housing Act of 1949 was part of President Truman’s Fair Deal. It authorized 810,000 units of new public housing. It lowered FHA requirements. It authorized $1 billion in loans, and $500 million in grants, to cities to acquire land for redevelopment. This resulted in the relocation of Black, Italian, and Mexican residents to create luxury housing, baseball stadiums, and arts centers. The Commission on Urban Problems surveyed 1,155 urban renewal projects. It found that 67% were residential before renewal, but only 43% were residential afterward.

In 1956, President Eisenhower signed the Federal-Aid Highway Act. It built 41,000 miles of road that linked virtually all of the nation's major cities. It improved evacuation routes from the cities in case of a nuclear war or other attacks. It also made it easier to construct suburban housing developments away from the cities. Many of the highways were constructed in former Black ghettos. Others bisected white and Black urban areas, further reinforcing segregation.

In 1964, the Civil Rights Act outlawed segregation in housing, voting, education, and use of public facilities. In 1968, the Fair Housing Act outlawed housing discrimination.

In 1977, Congress passed the Community Reinvestment Act to reverse the segregation caused by redlining. It mandated that regulators review banks’ lending records to these neighborhoods. Banks that rank poorly on their reviews might not get needed approvals. As a result, Black homeownership rose from 42.2% to 48.2% between 1995 and 2005.

Despite these laws, discrimination in housing continued as banks pushed Blacks into subprime mortgages. In 2011, the Center for Responsible Lending reported that 62.3% of Black people received mortgages with one more more high-risk feature between 2004-2008. That was 1.6 times the 38.2% given to whites. That was true even for Black borrowers with good credit. For example, 21.4% received higher-rate loans, compared to 6.2% of white borrowers.

Between 2004 and 2009, Wells Fargo Bank steered 30,000 Black and Latino borrowers into subprime mortgages. The bank targeted Black churches. They gave prime loans to white borrowers with similar credit profiles. Wells Fargo was ordered to compensate the minority borrowers for the extra costs incurred by higher interest rates and fees. The bank agreed to pay $175 million.

As a result, the financial crisis hurt Black people more than white people. The Pew Research Center found that Black households lost 53% of their wealth, compared to a 16% loss for white households.

How to Close the Home Equity Gap

The Department of Housing and Human Services could promote its home purchase counseling programs to Black first-time homebuyers. It could work with local minority agencies such as the NAACP and Urban League. It could make homebuyers aware of available programs such as the Good Neighbor Next Door. It could partner with Fannie Mae to provide homeownership education for first-time homebuyers through its “HomePath Ready Buyer” program.

Congress could relaunch the First-Time Homebuyer Tax Credit that lapsed in 2010. It gave a tax credit of 10% of the purchase price of a new or replacement home. The credit was limited to $8,000 for first-time homebuyers and $6,500 for repeat homebuyers.

The FHA could offer a program to first-time Black homebuyers that are similar to the Native American Veteran Direct Loan. It could subsidize bank costs as well as guaranteeing the loans. That would allow banks to waive the down payment and private mortgage insurance. It would offer low closing costs and a 30-year fixed-rate mortgage.

The Federal government could better support the Consumer Financial Protection Bureau. It oversees equal credit opportunity and fair housing. It also sets standards for all mortgage offerings. It protects homeowners by requiring they understand risky mortgage loans. It regulates risky mortgage products like interest-only loans. It also requires banks to verify borrower's income, credit history, and job status.

Regulators could also strengthen the enforcement of the Community Reinvestment Act. It makes sure banks don’t redline minority neighborhoods.

Congress could provide more funds to housing assistance programs like Section 8. That would keep renters' costs at an affordable level. Affordable housing is defined as that which costs less than 30% of a family’s income. Rising housing costs means that slightly more that 72% of extremely low-income renters spend more than 50% of their income on housing costs. That’s money they can’t save to buy a home. Thanks to funding cuts, less than 25% of those who qualify for the program can take advantage of it. The waiting lists are so full that the program does not accept new applicants in many states.

These programs could be funded by a reduction in tax credits to the wealthy. The National Low Income Housing Coalition suggests reducing the size of a deductible mortgage to $500,000. It would affect fewer than 6% of mortgages nationwide. But it would save $87 billion over 10 years that could be redirected to remedy the Black home equity gap.

It may be overdue, but the federal government could make good on its 1865 reparations promise. It could give 40 acres to descendants of each of the 3.95 million enslaved. That would be 158 million acres or nearly 25% of the 640 million acres owned by the federal government. For example, the Bureau of Land Management owns 248 million acres, most of it leased to cattle ranchers and miners.

In 2019, Democratic candidates for the 2020 presidential campaign reopened the issue of reparations. They endorsed a House bill to establish a commission to study how slavery and Jim Crow impact African-Americans today. The bill calls for suggestions to remedy these aftereffects.