The headline and an excerpt:
Elizabeth Warren’s New Housing Proposal Is Actually a Brilliant Plan to Close the Racial Wealth Gap by Mehrsa Baradaran and Darrick Hamilton/Slate October 26, 2018
“Last month, Sen. Elizabeth Warren released a $450 billion housing plan called the American Housing and Economic Mobility Act. The proposal is a comprehensive and bold step toward providing affordable housing for the most vulnerable Americans. The bill is the first since the Fair Housing Act with the explicit intent of redressing the iterative effects of our nation’s sordid history of housing discrimination. Critically, it has the potential to make a substantive dent in closing our enormous and persistent racial wealth gap.”
In this series of posts, I’m going to focus on “the iterative effects of our nation’s sordid history of housing discrimination”, basically the idea that one bad thing led to another, starting with housing discrimination and ending with decades of intergenerational poverty plaguing black communities. Baradaran and Hamilton lay particular blame on the practice of redlining, in which New Deal housing programs “helped millions of white Americans buy homes but deliberately refused to insure mortgages for black families, particularly in white communities”. According to Baradaran and Hamilton, such discriminatory practices allowed:
“…white families [to use] their home equity to secure small-business loans, send their children to college, or help their children put together home down payments—an iterative wealth building that was passed on to the next generation. In contrast, black families were left exposed to predatory private finance.”
In other words, discriminatory housing in the 20th century led to present-day racial inequities in education and wealth. This is a narrative in need of evidence. So I will explore that evidence, along the following lines:
How has the US government sought to redress historical inequities in home ownership within previously discriminated communities? How successful have these efforts been?
Do small businesses typically use home equity loans for their initial financing?
Have many parents used home equity loans to pay for their children's college education? How else have college students been able to pay for their education?
What is predatory private finance? Who have been the targets of predatory financing and why?
The rest of this post will address the first line of questioning: How has the US government sought to redress historical inequities and increase home ownership within previously discriminated communities? How successful were these efforts? Here goes…
Discriminatory laws, regulations and social practices in the US actually got their start well before the New Deal. As a result, ethnic minorities – especially the Chinese and African-Americans – were prevented from buying homes from whites or settling in white areas. The Fair Housing Act of 1968 sought to address housing inequities by making it unlawful for sellers, landlords, or financial institutions to refuse to rent, sell, or provide financing for a dwelling based on factors other than an individual’s financial resources.
Over the next 40 years, the federal government implemented a series of programs to expand home ownership within low-income minority communities. These programs were mostly administered by the Department of Housing and Urban Development (HUD) and included Section 235 FHA subsidized mortgages (1968), Emergency Homeowners Relief (1975), the HOME and HOPE programs (1990), Homeownership Zones (1996), ADDI (American Dream Downpayment Initiative/2003), and the Emergency Homeowners Loan Program (2010). These programs offered various kinds of assistance to home buyers and owners, including down payment assistance, grants, subsidies, vouchers to buy homes, forgivable loans, deferred-payment mortgages, and soft second mortgages.
I haven’t been able to find out what HUD has spent to date on programs to increase home ownership within low-income minority communities. According to one source, HUD’s total outlays between 1976 and 2006 were $869 billion (in 2001 dollars). I think it’s safe to say that between 1968 and 2018, HUD has spend well over a trillion dollars on housing assistance programs, which includes both renter and owner assistance.
Between exceptionally high default rates, abandoned properties, and costly foreclosures, the early homeowner assistance programs fared poorly. As for later programs, the verdict is still out. While more African-Americans own homes now than before the Fair Housing Act went into effect 50 years ago, the Black-White gap in home ownership hasn’t gotten smaller:
Accessed on 11/2/2018: https://www.zillow.com/research/homeownership-gap-widens-19384/
Why did HUD’s programs fail at raising the African-American home ownership rate, which is about the same now as it was when HUD came into being? This is what HUD had to say about the matter in 2006:
The share of low-income home buyers with severe payment burdens (over half of income) rose from 14.5% of buyers in the first part of the 1990s to 20.1% by 2003, a trend suggesting the rise in home ownership was fueled by more liberal mortgage underwriting, with a consequence that more first-time owners were subject to severe housing cost burdens.
Another trend during this period was the rise from 39% to 49% in the share of low-income first-time home buyers that consist of households with a single adult, with or without children. It is more challenging for these families and individuals to cope with unexpected crises and so they faced a greater risk of losing their homes.
Several longitudinal surveys have found that minorities at all income levels are 22-39% more likely to leave home ownership than whites and that close to half of low-income buyers do not sustained home ownership for more than five years, which doesn’t allow much time to build up home equity.
However, there is no indication that first-time buyers were systematically using higher cost or riskier mortgage products—at least not as evidenced by data from the American Housing Survey covering the period up through 2003.
It appears that the main issue is less about buying homes than keeping them. Would throwing another $450 billion at the problem make that much difference? I don’t know, but I doubt it. Why? Because it doesn’t sufficiently address what leads to defaults, property abandonment, and foreclosures: reliance on the earnings of single adults with volatile income streams and poor earning prospects. Of course, the federal government should continue offering home ownership assistance to low-income but credit-worthy families, but helping those unprepared to take on the long-term burden of home ownership does no one a favor.
Next: Do small businesses typically use home equity loans for their initial financing? Have many parents used home equity loans to pay for their children's college education? How else have college students been able to pay for their education?
Reference:
Herbert CE and Belsky ES. 2006. The Homeownership Experience of Low-Income and Minority Families: A Review and Synthesis of the Literature. Washington, DC: U.S. Department of Housing and Urban Development, Office of Policy Development and Research, available at: http://www.huduser.org/Publications/PDF/hisp_homeown9.pdf
Links:
https://www.zillow.com/research/homeownership-gap-widens-19384/
https://rutgersrealestate.com/blog-re/can-we-change-the-game-in-low-income-housing/
https://www.huduser.gov/portal/periodicals/em/fall12/highlight1.html
https://www.innovations.harvard.edu/sites/default/files/nlihc_changing_priorities.pdf
https://www.huduser.gov/portal/Publications/pdf/HUD-968.pdf