Recap: The gap in Black-white homeownership rates recently reached 30.1% in the U,S. Per Jung Hyun Choi of The Urban Institute, three factors explain around 80% of this gap: difference in Black-white income (31%), marital status (27%), and credit scores (22%). Other factors include housing supply, housing affordability, and racial segregation, especially the availability of affordable housing within a reasonable commute distance of racially segregated neighborhoods. After accounting for these factors, about 5% of the difference in Black-white homeownership remains unexplained. Candidate explanations for the remaining 5% gap include parental wealth, student debt, information access, vestiges of policies (e.g., mass incarceration), and lower home appreciation rates in Black-dominant neighborhoods. Go here for more on factors underlying the Black-white homeownership gap.

I’m going to assume that reducing the Black-white homeownership gap is a worthy goal mainly because homeownership provides a way to build wealth and increase residential stability. For many, homeownership is also a great source of pride, pleasure, and purpose. That said, homeownership is not for everyone, especially those just a few paychecks away from being broke. Helping such individuals buy a home is doing them no favor if they later lose the home to foreclosure or are forced to sell at a loss. Which happens all too often in the Black community.

A lot of policies designed to reduce the Black-white homeownership gap seem to assume the problem lies with biased mortgage lending. Yet 82% of Blacks have bought a home at least once by the time they are 60 or 61. The problem is that many do not sustain homeownership: by age 55-64, just 53% of Blacks own a home, compared to 82% of whites. More from the Urban Wire:

“Black households are less likely to remain homeowners after owning their first home. The number of black homeowners who transition to rental housing before turning 60 or 61 is substantially higher than white homeowners. For example, of the households who purchased their first home after age 44, 34 percent of black homeowner households switched to rental housing, while only 9 percent of white households did so. This suggests that black households are less likely to sustain their homeownership after first buying, which aggravates their future wealth-building potential.”

- Choi, McCargo, and Goodman (2019) Three differences between black and white homeownership that add to the housing wealth gap.

I am not saying that biased lending has nothing to do with the Black-white homeownership gap. But some lending practices that appear biased are based on rational business calculations. For example, lenders use credit scores to figure out how likely one is to pay back a debt. Unfortunately, this practice makes it harder for some Blacks to qualify for mortgages or at least mortgages with the best terms. But that doesn’t mean lenders should abandon using credit scores in evaluating mortgage applications. Credit scores are actually good predictors of default risk.

To understand why, consider what goes into a credit score. Per The Balance, here’s how your credit score is determined: 

  • Payment history: 35%. Missed payments or prior defaults = bad.

  • Current debt: 30%. Maxed out credit cards = bad.

  • Length of credit: 15%. Long history of borrowing and paying it back = good

  • New credit: 10%. Applied for numerous loans in the recent past = bad

  • Types of credit: 10%. Has a healthy mix of different types of debt: auto, home, credit cards, and others = good

Generally speaking, one needs a score of at least 620 to buy a home and at least 740 to qualify for the best interest rates on mortgages. Striving to improve one’s credit score to get in that range involves acquiring habits that increase the odds not only of getting a decent mortgage but also of sustaining homeownership for a long time. Now for the modest proposal: potential homebuyers with low credit scores should be offered free counseling on how to improve their scores and overall financial wellbeing, e.g. debt-to-income level, savings, etc.. Not a pamphlet or video but at least two serious in-person counseling sessions, paid for by Uncle Sam. Those who complete counseling and raise their credit score to at least 620 could then seek further government assistance to help them qualify for a mortgage.

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References:

Breaking Down the Black-White Homeownership Gap by Jung Hyun Choi. Urban Wire/Housing and Housing Finance: The blog of the Urban Institute. February 21, 2020. https://www.urban.org/urban-wire/breaking-down-black-white-homeownership-gap

The State of the Nation's Housing 2021/The Harvard Joint Center for Housing Studies https://www.jchs.harvard.edu/state-nations-housing-2021

Three differences between black and white homeownership that add to the housing wealth gap Jung Hyun Choi, Alanna McCargo, and Laurie Goodman. Urban Wire/Housing and Housing Finance: The blog of the Urban Institute. February 28, 2019