Researchers from the Urban Institute (UI) have conducted a study that showed American Black and Hispanic homeowners, even prior to the COVID-19 pandemic, accrued a smaller financial benefit from homeownership than White homeowners.
“Homeowners of color typically had lower housing equity, because they purchased homes of lower value with higher mortgage debt later in life,” wrote Michael Neal, Senior Research Associate, and Jung Hyun Choi, and John Walsh, Research Associates.
“They also had marginally higher costs associated with homeownership, largely due to the greater preponderance of mortgages and slightly higher mortgage rates thanks largely to lower credit scores as well as higher loan-to-value and debt-to-income ratios.”
The researchers identify lower wages and assets as well as a lack of intergenerational wealth as significant contributors to these differences.
They also highlight the historic role of racially discriminatory practices in real estate sales, value-stripping zoning laws, wealth-stripping property laws and what they call “violent attacks against communities of color.”
The researchers offer four proposals to address persistent discriminatory practices and increase the value of homeownership for homeowners of color:
Reform local land use and revisit zoning laws and regulations. Some cities such as Minneapolic are rethinking zoning laws, the researchers noted. This helps to create affordable housing, according to another UI report. But, they said, some areas continue to create or perpetuate “exclusionary barriers.” They recommend that policymakers put racial equity at the center of local zoning and land-use laws.
Expand down-payment assistance. This would support sustainable homeownership especially for communities of color, the researchers wrote. Some shoppers would otherwise qualify for homeownership but lack the necessary down payment funds. It would also prevent new homeowners from depleting their savings, allowing them to build wealth, afford home repairs, and, in general, maintain homeownership.
Strengthen pre- and post-purchase counseling. The cost of maintaining homeownership can be surprising to new homeowners. Those on a tight budget can face mortgage delinquencies or even foreclosure. Counseling for borrowers will increase the benefits of homeownership for people of color, the researchers wrote, and will help to prevent negative outcomes related to the cost of new homeownership.
Develop financial products for home maintenance, repair, and improvement. The ability of homeowners of color to maintain and improve their home may be more difficult because they typically have less equity and fewer liquid assets. Maintenance costs, such as repairing a roof, fixing plumbing, or replacing a hot water heater, may reduce homeownership benefits directly and indirectly if the homeowner uses a home equity line of credit or cash out refinancing to finance the improvements. Improving access to small dollar home improvement loans for renovation and repair would help (McCargo, Bai, and Strochak 2019) Getting access to financing for smaller repairs (e.g., up to $10,000) is difficult but could create value in the property, which translates to equity and wealth. “Providing affordable repair and renovation financing can help bridge the gap in homeownership for people of color.
A final potential suggestion by the researchers is to create escrow savings accounts for homebuyers to help them meet major maintenance or repair needs. This insurance account could be funded through a borrower contribution in lieu of a larger down payment on the home. The fund would then function as an operating reserve. Such an insurance fund would prevent one channel of mortgage delinquency by providing an operating reserve to homeowners with fewer financial assets and would help families build long-term wealth.
The entire report can be viewed here on the Urban Institute website.