How to Close the Racial Homeownership Gap

Homeownership is a key contributor to wealth generation, yet homeownership rates vary significantly by race. According to the National Association of Realtors, as of March 2023, while 72.7 percent of White Americans were homeowners, only 44 percent of Black Americans were homeowners (the rate for Latinx Americans was 50.6 percent and for Asian Americans 62.8 percent). The Black-White homeownership gap, the report adds, was the highest in 2023 that it had been in a decade. But there are clear ways to narrow this gap, provided there is the political will to do so.

We know that the racial homeownership gap is, in large measure, the product of historic redlining, as well as past and ongoing discrimination. Despite federal fair housing legislation and other policies like the Community Reinvestment Act, the gap has not narrowed but increased. 

In the Southeast…if the gap in homeownership rates between Black and White households were closed, the racial wealth gap would be 38 percent lower.

One driver of this ongoing inequality is the current federal system of financing, which largely depends on two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac. These agencies play a vital role in supporting homeownership, but the standards they use nonetheless have the effect of maintaining or even expanding the racial homeownership gap. 

Homeownership, Wealth, and the Racial Wealth Gap

To many, it may seem obvious that homeownership helps families build wealth. Still, it is important to lay out the numbers to understand how large an impact it has. 

The median wealth of homeowners ($255,000) is more than 40 times greater than that of renters ($6,300). Each additional year of homeownership, contends one Journal of Housing Economics study, increases a household’s total net worth by $13,700, on average. Among households of color, the median wealth gap between homeowners and renters is even starker. The median wealth of Black homeowners ($113,130) is 60 times greater than that of Black renters ($1,830). 

Given these numbers, reducing the homeownership gap offers a valuable tool to help close the racial wealth gap. In the Southeast, for instance, one study found that if the gap in homeownership rates between Black and White households were closed, the racial wealth gap would be 38 percent lower.

The causes of the racial homeownership gap are multifaceted. There are several points throughout where systemic inequities arise. Some occur during the initial home purchasing process. Other structural barriers lower the home’s value from the start—limiting opportunities to grow generational wealth. Researcher Andre Perry has written extensively about how appraisal bias negatively affects wealth building for Black households to the tune of $48,000 per homeowning family, on average.

While barriers to homeownership persist for households of color, these barriers are possible to overcome.

Another major contributor to the homeownership gap is uneven access to mortgage loans. In 2021, the percentage of loan originations for Black borrowers in Deep South states substantially trailed the percentage of the population represented. Denials remain lopsided as well, even after controlling for income. The denial rate for Black borrowers in the Deep South earning more than $150,000 was higher than for White borrowers earning between $30,000 and $50,000.¹

According to 2021 federal Home Mortgage Disclosure Act data, Black households in Mississippi have the country’s highest mortgage loan denial rate (40 percent). This is more than twice the rate of White households. Statewide in Mississippi, 17 percent of all mortgage originations were to Black borrowers (in a state that is 36 percent Black); in contrast, 70 percent of loans went to White households. Closing gaps in mortgage lending is critical to closing racial homeownership gaps. 

A Community Finance Solution

While barriers to homeownership persist for households of color, these barriers are possible to overcome. HOPE, a community development financial institution (CDFI) that works in historically underresourced communities across the Deep South, has established lending policies that have improved access to credit for borrowers of color and women. As of the end of 2022, HOPE had $130 million in mortgage loans outstanding, with 90 percent of its loans originated to borrowers of color.

One tool HOPE uses in its lending is an in-house mortgage product, the Affordable Housing Program (AHP). AHP is one of the most effective tools available to HOPE to build wealth in the Black community. Through AHP, mortgages are manually underwritten, and nontraditional indicators of credit repayment history are considered (such as including rent and utility payments that are often excluded from credit history, systemically disadvantaging Black applicants). 

The product also discounts deferred student debt, does not require mortgage insurance, and accepts credit scores as low as 580. (By contrast, most conventional lenders disqualify borrowers with scores below 620, and some are even more stringent.) The credit score barrier is significant. Borrowers in rural areas, for example, have less access to credit than their counterparts in urban areas. 

The AHP also allows for a loan-to-value ratio of 100 percent, compared to the conventional level of 80 percent. HOPE finances 100 percent of the home’s value, eliminating down payment barriers as many low-wage earners have the cash flow to make monthly payments but lack the excess income to save for a down payment. 

In short, HOPE’s AHP was designed to address the systemic challenges that perpetuate the racial wealth gap. This program has also proven to be financially sustainable. Over the last five years, the annual net charge-off rate (loans that have to be written off as unpayable) at HOPE has never exceeded 67 basis points (two-thirds of 1 percent), and the charge-off rate for 2022 was less than two-tenths of 1 percent.  

A Need for Federal Scale

HOPE’s impact is a drop in the bucket relative to the region’s needs. The demand for mortgages like the ones described above surpasses half a million in the Deep South alone. The need, in short, is for scale.

Nationally, the GSE record of lending to Black borrowers falls short. In 2022, 7 percent of total home loans facilitated by both Fannie Mae and Freddie Mac were to Black households, even though Black Americans comprise 13.6 percent of the US population. 

A key strategy for funding the mortgage market includes a process whereby lenders originate a mortgage, sell it to Fannie Mae and Freddie Mac, and then use the proceeds of the sale to fund another mortgage. This is known as the secondary market. Scaling AHP-type loans across the mortgage lending system requires an active secondary market and, by extension, federal housing agencies to buy these loans. Such actions would create the same cycle enjoyed by the conventional mortgage market that has served a segment of the American economy so well. 

Currently, the secondary market is not working for too many potential homeowners. As a result, Black households in particular are being denied the wealth-building opportunity of homeownership. 

To remedy this situation, GSEs must act with intention. Specifically, these federal mortgage guarantors must be held accountable for the development, design, and scaling of products that address systemic discrimination in housing. 

CDFIs like HOPE have shown that it is possible to design lending products that are financially sustainable for lenders and that enable households of color to qualify for home mortgages. What is needed now is the political will to make these mechanisms broadly available throughout the federal mortgage lending system. In a nation where people of color are the emerging majority, the time to create systems that can effectively counter structural racism in the mortgage market is now.

 

Notes

1. Denial rate was calculated by dividing the number of denied applications by the number of applications submitted. Applications submitted includes loans originated, applications approved but not accepted, and applications denied.