This article details the hurdles minority households face in becoming homeowners, and offers actions California real estate agents may take to mitigate these obstacles to homeownership.
Wealth and access to homeownership
Homeownership is the main source of wealth for American families. To increase household wealth, the U.S. government has subsidized and encouraged homeownership through various tax incentives and mortgage programs, like:
- the mortgage interest deduction (MID);
- Federal Housing Administration (FHA)-insured, low down payment mortgages;
- low ceilings on capital gains tax; and
- in California, Proposition 13.
Despite these incentives, some groups have greater difficulty becoming homeowners than others, which leads to an enormous wealth disparity between groups — racial and ethnic groups, that is.
The average household wealth of White households is $114,785 as of 2011, according to an analysis of wealth, homeownership and race by Zillow. This is more than four times greater than the average Black household’s wealth of just $24,792.
Much of this wealth gap can be explained by lower homeownership rates among Black and other minority households.
Why minority households steer clear of homeownership
If homeownership is the key to wealth, why don’t more minority households buy homes?
If past experience has taught minority communities anything, it’s that for minorities, homeownership is not the “safe investment” many claim it to be.
The National Bureau of Economic Research recently published a study on the impact of the 2008 Great Recession on the homeownership rates of Black and Hispanic households compared to White households (Asian-American households were excluded from the study). It found the 2009 foreclosure crisis had a greater effect on minority homebuyer communities compared to White communities. For instance:
- in 2004, when Black homeownership was at its highest, 49.7% of Black households were homeowners — in 2010, this percentage had shrunk to 45.6%; and
- in 2007, when Hispanic homeownership was at its highest, 50.1% of Hispanic households were homeowners — in 2010, this percentage had fallen to 47.5%.
Put another way, over 1-in-10 Black and Hispanic homeowner households lost their homes to foreclosure during this time. In contrast, just 1-in-25 White homeowner households were foreclosed upon.
Why were Black and Hispanic homeowners more than twice as likely than White homeowners to lose their homes? Three factors converged to increase the likelihood of foreclosure:
- subprime or predatory lending;
- high debt-to-income ratios (DTIs) allowed by lenders; and
- high cases of employment instability.
Millennium Boom, the perfect storm for minority homebuyers
The most dangerous factor that increases the likelihood of foreclosure for Black and Hispanic homebuyers is predatory lending.
The largest recognized case of predatory lending was settled by Bank of America (BofA) in 2012 for their subsidiary company, Countrywide’s, discriminatory lending practices. BofA paid $335 million to the victims of Countrywide’s actions.
Countrywide discriminated against minority homebuyers in two ways, by:
- charging higher fees to minorities than White homebuyers with equivalent qualifications; and
- steering minority homebuyers into subprime mortgage products, even though many minority homebuyers had equal or better credit histories than other White homebuyers who were not shown bad mortgages.
Higher upfront fees and subprime mortgages led to the minorities targeted by Countrywide paying much more for mortgages than similarly qualified White homebuyers. Therefore, when the housing market and the economy went bust following the Millennium Boom, it was more difficult for minority homebuyers to make mortgage payments than the White homeowners who worked with Countrywide.
Part of this steering included lenders who encouraged minority homebuyers to take on more debt than they would be able to carry. It’s common knowledge that the higher a homebuyer’s DTI, the less likely they are going to be able to make future mortgage payments. Lenders of the Millennium Boom era did not seem to care about this axiom, and knowingly pushed minority homebuyers into mortgages they were unable to pay. This resulted in higher immediate fees for lenders, who jettisoned the risk to other investors by selling the bad mortgages on the secondary mortgage market — out of sight, out of mind.
The third reason minority homeowners were more likely to lose their home following the Great Recession is due to the statistical fact that the heads of Black and Hispanic households are more likely to be employed in professions more adversely affected by economic downturns, like manufacturing and other hourly jobs. In other words, they are more likely to lose their jobs than White heads of households.
Job loss and the inability to pay are the biggest reasons homeowners default on their mortgages, according to the Federal Reserve Bank of Boston. Other financial shocks also contribute to the decision to default, which is typically a struggling household’s last resort.
The problem for California real estate
California is a large, diverse state. Nearly 40% of the population identifies as Hispanic or Latino, according to the U.S. Census. Over 14% identify as Asian and nearly 7% identify as Black or African American. Therefore, discrimination in the mortgage and housing markets has a far-reaching influence on our state.
Another issue for minority homebuyers, not mentioned in the National Bureau of Economic Research report, is the discriminatory behavior of some real estate agents.
Compared to similarly qualified White clients, the U.S. Department of Housing and Urban Development (HUD) finds real estate agents nationwide show:
- 18% fewer for-sale listings and 4% fewer rental listings to Black households;
- 19% fewer for-sale listings and 7% fewer rental listings to Asian households; and
- roughly the same amount of for-sale listings and 7% fewer rental listings to Hispanic households.
Why do real estate agents tend to show minority homebuyers fewer listings than their White counterparts? It’s usually implicit bias on behalf of the real estate agent. For instance, some real estate agents may think they’re doing their Black clients a favor by only showing them homes in “Black neighborhoods” (an unlawful practice). Or agents may not realize they’re slower to respond to requests by minority homebuyers.
This perpetuates neighborhood segregation, which limits minority household access to higher quality jobs, better schools and other resources that disproportionately benefit White households.
The only way to stop a California real estate agent discriminating against minorities? The California Bureau of Real Estate (CalBRE) may enforce anti-discrimination laws. However, CalBRE will only pursue an agent for ethics violations after first receiving a formal complaint.
In cases of discrimination, most homebuyers, sellers and renters do not know how to take appropriate action by contacting CalBRE. Therefore, it is up to fellow agents and brokers to report discriminatory practices at CalBRE’s website. [See the “Fair Housing” section in Agency, Fair Housing, Trust Funds, Ethics and Risk Management, available through the first tuesday Realtipedia]