Connecting state and local government leaders
COMMENTARY | This strategy has not lead to real progress in the last few decades. More structural changes are needed in many policy areas to increase wealth for Black and Brown Americans.
This story was first published by the Urban Institute. Click here to read the original version.
For decades, policymakers have favored homeownership as the main mechanism for individuals and families to build wealth. This stance has been reflected everywhere from federal tax policy, which allows homeowners to deduct mortgage interest and property tax payments from income taxes, to local zoning regulations, which often prohibit high-density, multifamily buildings.
Owning a home is undoubtedly an effective means of wealthbuilding, including for households of color. In 2019, Black homeowners had a median household wealth of $113,130—a majority of which came from their homes—more than 60 times that of Black renters. The disparity was similar, if slightly less stark, for Latinx households.
But policymakers’ focus on homeownership hasn’t led to meaningful progress in closing the racial wealth gap; the disparity in wealth between white and Black households is larger now than it was in 1968, when the Fair Housing Act was passed. This gap is a result of historic and ongoing structural racism and systemic discrimination in not just housing but also employment, education, banking and policing. As a result, though efforts to ensure households of color have equal access to homeownership are important for narrowing the racial wealth gap, closing it will require bold, structural reform that goes beyond any one policy.
Many experts have questioned the merits of focusing on widespread homeownership as a policy goal, both at the societal and individual levels. Below, I summarize evidence suggesting that focusing only on expanding access to homeownership is not just insufficient to closing the racial wealth gap but also exclusionary, inequitable and unsustainable.
1. More than half of Black- and Latinx-led households are renters; they do not benefit from policies targeted to homeowners. Despite increasing in recent years, the share of American households who own their homes is still at its lowest level in nearly four decades and is expected to decrease as a result of both shifting preferences and demographic trends. Homeownership rates for people of color also remain low, in part because of policies and practices that have prevented Black people and other people of color from purchasing homes. In 2019, the homeownership gap between Black and white families reached an all-time high of 32.5 percentage points.
Renters currently represent nearly 40% of all households, and more than half of Black- and Latinx-led households are renters. Subsidizing homeownership as the primary route to building wealth thus excludes a significant portion of the population, who are disproportionately people of color. And though homeowners benefit from both tax breaks and rising property values, the latter have been linked to higher rents, which further disadvantage renters. Moreover, policies that privilege homeowners over renters may press families who are unwilling or unable to purchase homes into doing so, sometimes to their financial and psychological detriment.
2. The benefits of homeownership are smaller for people of color, while the costs and risks are larger. In addition to being exclusionary, homeownership is also an inequitable means of wealth building for several reasons, chief among them being that Black and Latinx households tend to own lower-priced homes. Although systemic disparities in income, wealth, property and neighborhood conditions contribute to this discrepancy, a large share has also been attributed to racialized bias in the housing market. One study found that homes in majority-Black neighborhoods across the country are underpriced by up to 23%, resulting in a staggering $156 billion in lost home equity.
And despite purchasing lower-priced homes on average, Black homeowners have more mortgage debt (both in absolute terms and relative to the price of their homes), which contributes to greater financial risk. Research has found that Black and Latinx homeowners of all income levels experience higher rates of distressed home sales, including foreclosures, which lead to lower annualized returns on average. Over 10 years, this disparity results in Black and Latinx homeowners receiving returns on their investments that are 44% and 22% lower than white homeowners’ returns, which limits longer-term wealth accumulation.
Compounding the issue is that homeownership costs (which, in addition to mortgage payments, include property taxes, maintenance costs and insurance) are higher for homeowners of color than for white homeowners. Some of these higher costs have been attributed to racist practices, such as unfair methods of assessing property taxes. These further limit the benefits households of color receive from owning their homes, both relative to renting and when compared with white households.
3. Promoting homeownership contributes to negative climate effects, which disproportionately affect communities of color. Because most owner-occupied homes are detached single-family dwellings, policies that encourage homeownership also implicitly encourage sprawl at the expense of higher-density living. Urban sprawl in turn contributes to negative climate externalities, including increased pollution, congestion and energy consumption. These harmful effects are disproportionately borne by communities of color, which compounds existing inequities.
In addition, a third of all homes in the U.S. are considered to be at high risk of damage from natural disasters, and communities of color bear the brunt of this damage. One study analyzing changes in household wealth in counties with high damage from natural disasters found that white households experienced an increase in wealth of $126,000 on average over a 14-year period, while Black and Latinx households experienced an average loss of $27,000 and $29,000.
The emerging practice of “bluelining”—drawing arbitrary lending boundaries around neighborhoods perceived to have increased environmental risk (which often coincides with previously redlined neighborhoods)—threatens to further depress home values in neighborhoods of color and suggests that focusing only on subsidizing homeownership for wealth building is also unsustainable in the longer term.
Other Policy Approaches for Closing the Gap
The Biden administration has announced several initiatives to narrow the racial wealth gap, namely, expanding access to homeownership by tackling the appraisal bias and promoting small-business ownership. But evidence shows more needs to be done to close the gap. Beyond ensuring that households of color have equal access to homeownership and its benefits, some additional strategies that policymakers at all levels could consider include the following:
- Implementing high and progressive taxes on inheritances and wealth.
- Providing reparations to the descendants of enslaved Black Americans.
- Implementing baby bonds, which would provide every child with a publicly funded trust account at birth.
- Reducing personal and household debt, including by canceling student loan debt for qualifying households and reducing punitive fines and fees.
- Increasing access to retirement savings plans and matched savings accounts.
- Boosting household cash flows by reducing income inequities and providing protection against extraordinary shocks.
Some cities and states are already exploring these strategies. Connecticut and Washington, D.C. have enacted laws creating baby bonds. Evanston, Illinois established a reparations fund in 2019, and both New York and California have established task forces to study the possibility of reparations.
Although these efforts are critical and should not be discounted, support for structural reform will also need to come from the federal government. Rethinking the historical focus on homeownership is an important start because closing the racial wealth gap will require investments not just in housing but also in all other areas of society where people of color continue to be disadvantaged.
Samantha Fu is a policy associate in the Research to Action Lab at the Urban Institute, where she works on projects aimed at improving lives, strengthening communities, and promoting racial and economic equity.