Director of Research, Amber S. Hendley, presenting to the Chicago Community Trust’s Advancing Equity: Closing Homeownership Gap cohort. Pictured comparing 2021 mortgage lending differences between Black and White homebuyers in Folded Map™ twin communities of Greater Englewood and Edgewater. Photo courtesy of The Chicago Community Trust. Photographer, Eddie Quinones.
The stories we tell matter. The “why” behind our work drives the programs and policies we make, so if the story we tell about the problem is skewed, so too is the solution we create.
This is the start of a solutions-focused series designed to reframe homeownership’s role in closing the Black-White wealth gap. Far too often, homeownership is held up as the answer to the racial wealth gap. The well-intentioned idea is that because homeownership generates wealth, increasing Black homeownership to equal White homeownership will increase Black wealth to White wealth and thereby close the racial wealth gap. The issue with this perspective is that systemic disadvantage and lack of intentional disruption of that disadvantage prevent homeownership from generating the same type of wealth for Black people as it does for White people. Focusing on this narrative gets in the way of addressing the wealth issue more constructively, while only continuing generations of harm to Black lives and divestment in Black communities. Our goal is to shift the narrative around the racial wealth gap to create more effective strategies and improve racial equity. Until there is systemic change and intentional investment, homeownership will not meaningfully contribute to closing the racial wealth gap. We must seek out and speak the truth in order to create sustainable solutions and real change. We must paint a complete picture in order to create complete solutions.
We respect and appreciate the relationship between homeownership, dignity, and the American Dream. This series is not intended to discourage efforts to increase homeownership. Rather, our hope is to demonstrate the counterproductive nature of the narrative that elevates homeownership as the answer to closing the racial wealth gap. Our analysis and discussion show that this narrative is not true. Increasing the Black homeownership rate will not close the racial wealth gap, nor will it end generational wealth inequity. Instead, we must deconstruct and reform the entire homeownership system and its relationship to equitable wealth creation. Our goal is to use this series to transform the homeownership system into one that builds wealth equitably and encourage investment in many other wealth-building assets and investments. 1The non-financial benefits of homeownership, including empowerment, pride, control, stability, and connection with community.
Throughout this series, we will point out several challenges, each time sharing potential remedies. These remedies will be co-created with community, flowing from the network of those involved in and negatively impacted by wealth inequity (spoiler alert: that’s all of us). Our approach will mirror the broadness of this issue, ranging from capitalist to socialist and everything in-between. We aim to uplift perspectives that resonate in unique ways, new and old, with everyone. Our goal is not that we would all be comfortable with one solution or another, but rather that we would all sit uncomfortably with a perspective, voice or idea. It’s in discomfort and unfamiliarity that change occurs.
In our first article, we identify topics to be explored throughout the series. You can find the topics by selecting any number you see at the end of a paragraph. (We’ve already introduced the first topic—head back to the third paragraph to take a look!) All topics are also listed at the end of this first article.
Because our research team works in real-time with community members, organizations, and institutions, we’ll be gaining insight moment-by-moment throughout the life of this series. So while the production timeline will be structured around the topics we identify, it will also revolve around what’s happening in communities in real-time. The form of this series will mirror the diversity of the topics, people, places, and communities we explore. We do not plan to produce a chain of traditional research reports, but a stream of perspectives that reflect the journey of achieving justice and equity across many diverse spaces. Always, this series will be rooted in contextualized data with lots of community and institutional perspective.
The articles we put forth are written for community members because this is where lived experiences occur, this is where wisdom lies, and this is where change will take root. At the same time, responsibility for creating the change we seek does not fall on the shoulders of communities harmed by inequity. For this reason, we also write to all stakeholders and investors, including and especially those holding institutional positions of power. Our hope is that we all recognize our rightful place in the truth of this issue, and work together to employ our different positions to create equity.
Homeownership Alone Will Not Close the Racial Wealth Gap: On Income Inequality and Systemic Differences
This first article anchors our series, “framing the reframe,” so to speak. In Article 1, we show how homeownership will not close the racial wealth gap and why we must focus on more than just homeownership as the way for Black households to build wealth.
We also identify topics to be explored throughout the series. You can find these topics by selecting any number you see listed at the end of a paragraph. All topics are also listed at the end of this article.
Article 1: A Road Map
We begin by analyzing and presenting findings gleaned from 2021 mortgage lending data on White and Black (non-Hispanic) applicants in the city of Chicago. We discuss these data in two contexts: first, within the reality of racial income inequality; and second, within systemic differences in the homeownership system itself. (Systemic differences are those linked to significant structural and cultural causes, such as segmented labor markets, discrimination, and institutionalized racism. Systemic differences embed Black-White income inequality in every American generation.) Our analysis provides explicit examples of how the homeownership system lacks fairness, specifically as it relates to costs of loans, originations, and how wealth is built. Findings show differences in wealth gained both because of and apart from income, demonstrating the ineffectiveness of homeownership in closing the racial wealth gap with “business as usual.” We end this article with a call to adopt a wider systemic response to wealth inequity beyond the traditional homeownership solution to closing the racial wealth gap.
- Single-family homeownership has long been heralded as the key to closing the Black-White racial wealth gap. Currently, Black households hold 25¢ for every $12The Real State of Family Wealth: Quarterly Trends in Average Wealth and Demographic Wealth Inequality | St. Louis Fed. (n.d.). a White household holds and the Black-White homeownership rates are 45% to 75%3Racial Differences in Economic Security: Housing. (n.d.). U.S. Department of the Treasury. Retrieved March 21, 2023, respectively. The traditional narrative is: “If we elevate the Black single family homeownership rate to Whites’, then we can elevate Black wealth to White wealth and close the racial wealth gap.” 4The benefits, including wealth building advantages, of multifamily homeownership in Black communities.
- Many factors influence mortgage underwriting, traditionally summarized as income, credit and assets. For clarity, this article will summarize these factors as “income” and “debt.” 5How both income and debt inequality affect credit scores and asset accumulation.
- Article 1 focuses only on new homebuyers. Current homeowners face a myriad of other challenges including repair and insurance inequity that should be qualified and quantified.6The reality of maintaining homeownership for Black and White households.
- Here, we define wealth gains from homeownership as the difference between the property value of the home when the mortgage loan was made (originated) and the property value of the home at the end of the standard 30-year mortgage loan term. The median duration of homeownership in the US is 13 years7US Census Bureau. (2018, October 11). American Community Survey Data. Census.gov., so we will also comment on those wealth gains within the text.
- In our graphics, we show only data for the “typical” Black or White mortgage applicant, defined as “middle-income” for purposes of our analysis. To determine “middle-income,” we sorted incomes from least to greatest, and then divided the data into five equal parts. Each part is referred to as a “quintile.” We took the three middle quintiles (Q2, Q3, and Q4) and combined these to create the middle-income group. We did this separately for Black and White applicants. In this way, graphics represent the majority of each population, or the “typical” Black or White mortgage applicant.
It’s About Income
At the crux of this discussion is income. Wealth is important, but it is secondary to income. Income is the daily flow that allows us to maintain a life. Extra or “disposable” income offers the privilege of investing and accumulating wealth. 8The genesis of income inequality, why it has persisted and what we can do about it.
Income inequality is an important driver of the Black-White wealth gap. The Federal Reserve Bank of St. Louis stated that “in all states, White median household income is greater than Black median household income.”9Examining U.S. Economic Racial Inequality by State | St. Louis Fed. (n.d.). www.stlouisfed.org. Among our study of mortgage applicants in Chicago, the Black median household annual income is $78k, while the White median household income is $131k. The chart below shows these differences comparing “typical” Black and White applicants.
Directly tied to income is debt. Lower income raises the debt-to-income ratio (DTI), a key component of the mortgage underwriting process. Underwriters tend to view a DTI above 43% as unfavorable. Two individuals with the same amount of debt but different incomes will have different DTIs. The lower income individual will have a higher DTI, and will likely receive higher interest rates, fees, and mortgage costs because of it. Thus, Black households with less income acquire costlier mortgages at the outset. In our study, the average rate of households with a DTI above 43% across all Black households was 32%, but only 15% for White households.
Further, Black households generally maintain higher debt loads as a result of carrying more medical debts, higher student loan balances, and credit lines with less favorable terms and higher minimum payments.10 Munoz, A. P., Kim, M., Chang, M., Jackson, R., Hamilton, D., & Darity, W. A. (2015). The Color of Wealth in Boston. SSRN Electronic Journal. Altogether, this leaves less disposable income for other investments in wealth accumulation such as money market accounts, stocks and retirement funds. The chart below shows these differences in loan costs comparing “typical” Black and White applicants. 11The impact of income inequality on investment access and diversity as well as other important wealth building vehicles that should be included in Black household portfolios. 12The difference between what sociologist Louise Seamster, refers to as “Black debt” and “White debt,” and how they correlate to “bad debt” and “good debt.”
The chart below shows these differences in debt levels comparing “typical” Black and White applicants.
How Income and Debt Affect the Value of Your Home
Analyzing income and DTI is the best way to determine mortgage affordability. The industry standard is that one should not pay more than 30% of their income on housing. Given lower incomes, higher DTIs, and greater debt loads, Black mortgage pre-approval amounts are lower than their White quintile counterparts. Because mortgage pre-approval amounts directly correlate with buying power and property values, this means that property values are also lower for Black households compared to White households. In our study, the median property value across all Black households was $255k, compared to $445k for all White households. The chart below shows these differences in property values comparing “typical” Black and White applicants.
How Income and Debt Affect Wealth-Building Potential of Homeownership
Using current incomes of Black and White applicants, we can “simulate” the wealth gains from homeownership within the current system. For the last 20 years, the average home in the U.S. has appreciated at a rate of 5% per year.13FHFA House Price Index (HPI) Quarterly Report. (2002-2022). In our “simulation” of wealth gains, we use this 5% rate. Given average Black home values appreciate less than White home values14Perry, J. R. and A. M. (2022, December 5). How racial bias in appraisals affects the devaluation of homes in majority-Black neighborhoods. Brookings. , this is a very conservative simulation of disparities. In reality, differences in wealth from homeownership are much larger than what we’ve calculated here. Even still, the results are clear: in 30 years, median Black wealth gained would be $949k, while White households would gain $1.7M. Black households would gain only about half (56%) the amount of wealth Whites would. Note that after 13 years (the median duration time of American homeownership), the gap in wealth gained through homeownership would be $182k. Within this context, homeownership will not close the racial wealth gap. The chart below shows these differences in wealth gains comparing “typical” Black and White applicants.
But Wait, There’s More: Systemic Differences
While wealth disparities from racial income differences are striking enough, there is more to the story. Income alone does not account for the racial wealth gap as it relates to homeownership. How does the current homeownership system build wealth for White and Black households when income is removed from the equation and the only main difference is race? In this section, we run the same analysis, but set Black and White financial status equal. We use “middle-income” levels of Black applicants for both Black and White applicants and only analyze loans made to the “best” applicants in this “middle-income” range ($50k to $120k).
Recall that DTIs above 43% are viewed as unfavorable (with DTI, risk is expressed in terms of applicant’s debts compared to income). In a similar way, Loan to Value (LTV) ratios greater than 80% are also viewed as unfavorable. Here, an applicant’s income (defined by total value of assets) is taken into account by the amount of money an applicant is willing to put down on the property from their own resources. Lenders interpret higher LTVs as meaning the borrower has less skin in the game: because an applicant is making a lower down payment, it is perceived that they are less likely to follow through on paying back their loan (more likely to “default”). In this way, lenders use higher DTIs and LTVs as signals of riskier investments. In this section, we assess only Black and White applicants with DTIs at or below 43% and LTVs at or below 80% (the “best” applicants).
Because we have both removed Black-White income differences and used criteria for “best” applicants that also consider income, this analysis “doubly” accounts for income differences between Blacks and Whites.
Findings highlight systemic inequity, namely property value and treatment of applicants. At the same income and “best” DTI and LTV levels, Blacks have much lower property values than Whites. In our study, the median property value at equal income, DTI and LTV levels was $255k for Black households, compared to $485k for White households. Even when income was the same, home property value still differed, signaling the presence of other systemic factors that influence how Black and White property is valued. The chart below shows these differences in property values comparing “best” Black and White applicants. 15The Black-White property value gap and how it relates to appraisal bias.16The unequal landscapes of property value inequity and how this inequity is the result of historic race-based policies that harmfully extracted wealth from predominantly Black communities.17The role of government in recovering the lost wealth due to property value extraction and lack of investment in predominantly Black communities
At the same income and “best” DTI and LTV levels, Black households also have consistently lower rates of origination (when an applicant for a loan actually gets approved and the loan is made) and higher rates of denial. At the middle-income level, Black applicants received mortgages at a rate of 73%, compared to 92% for White applicants, and Black applicants were denied four times as often as White applicants. Black households also paid more for their loans—loan costs were $3,199 for Black households, compared to $2,571 for White applicants. Altogether, regardless of financial status, Black applicants are less able to access homeownership and receive costlier mortgages when they do. The chart below shows these differences in denial rates comparing “best” Black and White applicants.
How Systemic Differences Affect How Much Wealth Homeownership Gives You
What does all this mean for the racial wealth gap and the role of homeownership? Even at the same income and “best” DTI, and LTV levels, systemic inequity fully prevents homeownership from closing the racial wealth gap. After 30 years, with income levels, DTI, and LTV equal, Black homeowners still only gained about half (53%) the amount of wealth Whites did. In fact, Black median wealth gains were the same among “best” applicants as they were for the typical Black household ($949k), while White median wealth gains increased by $149k ($1.8M). As a result, the disparity in Black and White wealth gains is even greater among the “best” applicants. This clearly shows systemic inequity: while Whites benefitted from a “lower risk” profile, Blacks did not. It almost seems as if there is a wealth penalty for Black households that are more financially sound. Note that after 13 years (the median duration time of American homeownership), the gap in wealth gained through homeownership would be $221k. The chart below shows these differences in wealth gains comparing “best” Black and White applicants. 18The different costs and benefits associated with upward financial mobility for Black and White households. “There is no magical way to transform no wealth into great wealth simply by learning more about how to manage one’s monetary resources. While wealth begets wealth, typically no wealth begets no wealth, regardless of how astute a money manager the person may be.” Darity, W., Hamilton, D., Paul, M., Aja, A., Price, A., Moore, A., & Chiopris, C. (2018). What We Get Wrong About Closing the Racial Wealth Gap 2.
Conclusion and Bringing in Other Voices
To close the wealth gap, we need to paint a clearer picture of the entire homeownership system. Evidence shows that, as it stands today, homeownership on its own will not close the racial wealth gap. In this first article, we highlighted the “simple” math behind the problem of using homeownership as the tool to close the racial wealth gap. Black homeowners start with lower financial status and initial home values than White homeowners. Applying the same appreciation rate yields less gain for Black homeowners over time. Right now, the only way owning a home will close the racial wealth gap is if Black homeowners enjoy a higher appreciation rate than White homeowners.
In this article, we chose to focus on debunking the claim that homeownership will close the racial wealth gap because this claim has long been touted as the solution and has received the most emphasis and funding.
This article sets the stage for our series and our goal of helping close the racial wealth gap through a reframing of the issue. This reframing is as follows:
- Homeownership as it exists is unequitable and only perpetuates the racial wealth gap. Homeownership needs a strategic overhaul to become a meaningful player in closing the racial wealth gap.
- Regardless of whether equitable homeownership reform takes place, homeownership’s role must be rationalized to give space for other assets and investments that include things like entrepreneurship, estate planning, and retirement accounts.
Community voices regarding the challenges they face is the ground from which solutions grow. We’re moving to co-create a practical solution to close the wealth gap, and we are calling on community, government, philanthropy, and the financial industry to do the same. Stay tuned as we continue this journey and explore:
- The economist’s wealth gap solutions, specifically Baby Bonds and Reparations
- The role “decommodifying” housing could play in closing the racial wealth gap
- The genesis of income inequality, why it has persisted and what we can do about it
- The benefits, including wealth building advantages, of multifamily homeownership in Black communities
- How both income and debt inequality affect credit scores and asset accumulation
- The reality of maintaining homeownership for Black and White households
- The non-financial benefits of homeownership, including empowerment, pride, control, stability, and connection with community
- The impact of income inequality on investment access and diversity as well as other important wealth building vehicles that should be included in Black household portfolios
- The difference between what sociologist Louise Seamster, refers to as “Black debt” and “White debt,” and how they correlate to “bad debt” and “good debt”
- The Black-White property value gap and how it relates to appraisal bias
- The unequal landscapes of property value inequity and how this inequity is the result of historic race-based policies that harmfully extracted wealth from predominantly Black communities
- The role of government in recovering the lost wealth due to property value extraction and lack of investment in predominantly Black communities
- The different costs and benefits associated with upward financial mobility for Black and White households