How do racial inequities limit homeownership opportunities?
The racial wealth gap
Black and Hispanic/Latino households face unique barriers to homeownership that prevent access to the beneficial outcomes associated with homeownership, such as wealth building, improved health, and higher educational attainment. Historically, structural and institutional obstacles faced by racial and ethnic minorities compounded over time to produce these inequities.
The racial wealth gap
The typical white family has five to eight times the wealth of a typical Black and Hispanic/Latino family. Black homeowners lag white homeowners’ overall accumulated wealth and amount of equity amassed in their homes, which is the primary contributor to their net wealth. But how do the financial returns of Black and Hispanic/Latino homebuyers compare with those of white homebuyers? After accounting for the annual costs and benefits of homeownership, Black and Hispanic/Latino homebuyers —regardless of income level — achieved returns that outpace those of white homebuyers. This result centers on Black and Hispanic/Latino homebuyers having higher ratios of imputed rent (the rental value that homeowners would get from renting their home at market rates) to home values. However, Black and Hispanic/Latino homebuyers face key barriers that may affect their ability to build equity.
What are the key barriers to building home equity for Black and Hispanic/Latino homebuyers?
Black and Hispanic/Latino homebuyers tend to use debt to finance homeownership and face more expensive mortgage financing, paying higher mortgage rates.
Black and Hispanic/Latino homeowners are more likely to finance homeownership through debt. The median loan-to-value ratios for Black and Hispanic/ Latino homeowners were 66% and 61%, respectively, compared with 56% for white homeowners.
On average, Black homebuyers pay 29 basis points more than comparable white homebuyers. Financial technology lenders reduce this disparity somewhat, but borrowers of color are still charged interest rates that are typically 8 basis points higher than they charge white borrowers with similar financial characteristics.
During the housing boom of the 2000s, subprime loans were disproportionately concentrated in communities of color, and Black and Hispanic/Latino borrowers were more likely to receive subprime loans and adverse pricing. Subprime lending strips equity, with the excessive fees paid to lenders, contributing to an excessive rate of foreclosures. One in 5 subprime loans end in foreclosure.
Black homeowners are 16.5% less likely to refinance than white homeowners, and when they do refinance, Black homeowners pay interest rates that are about 1 percentage point higher. This translates to over $22 billion in lost equity to Black homeowners over a 30-year period.
Homes purchased by Black homebuyers tend to be lower-valued, appreciate more slowly, and have higher property taxes
Even after conveying their preferences, homebuyers of color, especially Black homebuyers, are more likely to be steered to disadvantaged neighborhoods by their real estate agents despite having characteristics similar to white buyers. This contributes to households of color tending to purchase homes in residentially segregated neighborhoods that are likely to experience limited or even negative home appreciation.
Homes located in formerly redlined areas have appreciated at half the rate of homes in greenlined areas, or neighborhoods with the lowest risk rating. Black homeowners are five times more likely to own in these formerly redlined areas than in greenlined areas.
In neighborhoods where Black households represent the majority of the population, homes are valued at about half the price of homes in neighborhoods where there are no Black households. Furthermore, similar quality homes located in neighborhoods with similar amenities are worth 23% less in majority Black neighborhoods, compared with those with very few or no Black residents.
Black homeowners also pay higher property taxes than do white homeowners. For every $1 of property taxes paid by white homeowners, Black homeowners pay an additional 10 to 13 cents. This is due to the higher tax-assessed values of their homes within similar neighborhood types and the lower likelihood that they will appeal assessments and receive reductions in assessments. This disparity in assessment amounts to an extra $300-$390 annually for the median Black homeowner.
Black and Hispanic/Latino households are less likely to sustain homeownership.
Households of color with low incomes are slower to transition to ownership, more likely to return to renting, and less likely to return to homeownership if they have transitioned to renting than white households at similar income levels. Less than half of homeowners of color with low income remained homeowners within four years of becoming a homeowner, compared with 60% of white homeowners with low income.
For those able to sustain homeownership through economic decline, Black and Hispanic/Latino households are more likely to end up with negative equity than comparable white homeowners. This is largely driven by the housing market in which they purchased their homes.
How Habitat responds
Habitat serves a diverse range of homeowners, providing more equitable access to low-cost financing that can help support building home equity. Mortgages for all Habitat homeowners, regardless of race, are priced to be affordable, with monthly payments kept at 30% or less of income, and Habitat affiliates can create unique financing options that meet the needs of all of their homebuyers.
The counseling and classes offered by Habitat affiliates can help ease the transition to homeownership for households of color with low income and better position them to sustain homeownership.
Habitat advocates for policies that increase and broaden access to safe and sound credit for underserved populations and help close the homeownership gap for Black households and other communities of color.
Habitat also advocates for anti-racist housing, lending and land-use policies at the local, state and federal levels that seek to increase racial equity in homeownership.
Habitat’s new Beloved Community initiative will provide training and grants for Habitat affiliates to engage a greater diversity of community members and young people to raise awareness of the housing disparity.
The Why Home Matters evidence series is a multi-part exploration of existing research on the impact of homeownership created by Habitat for Humanity International. Each evidence brief in the series investigates and presents evidence on outcomes related to affordable housing and homeownership while also highlighting specific ways that Habitat’s work contributes to improving outcomes for families and communities.