The Racial Wealth Gap and Homeownership Nonsense

Matthew Desmond has a piece in the New York Times about homeownership and racial inequality. The piece is mostly good, but one part of it irked me:

While most white families own a home, a majority of black and Latino families do not. Differences in homeownership rates remain the prime driver of the nation’s racial wealth gap. In 2011, the median white household had a net worth of $111,146, compared with $7,113 for the median black household and $8,348 for the median Hispanic household. If black and Hispanic families owned homes at rates similar to whites, the racial wealth gap would be reduced by almost a third.

This statistic is pretty misleading. It is sourced from a Demos report put out in 2015, which explains how it is derived:

We tested the effects of equalizing homeownership rates among white, Black, and Latino families on the racial wealth gap. Our model looks at wealth accumulation by race and ethnicity if the existing home owning population among Black and Latino households matched the 73 percent rate of white families. In other words, what if Black and Latino homeowners made up 73 percent of each of their respective population subgroups, without changing typical home values for whites or households of color? The model did not control for other characteristics that might distinguish homeowners from non-homeowners.

As a background, 73 percent of whites in this sample own their own home while just 45 percent of blacks and 47 percent of Latinos do. All the authors do is take the 45 percent of black families that own their home in the sample and inflate their size so that they make up 73 percent of black families. Similarly, they take the 47 percent of Latinos who own their home and inflate their size in the sample so that they make up 73 percent of Latino families. Then they find the median black and Latino net worth with this reweighted sample.

The problem, as I have bolded, is that this kind of calculation does not do anything to determine whether it is the homeownership that is responsible for the difference. The suggestion of the report, which is picked up by Desmond, is that homeownership causes wealth when in reality it is more likely that wealth causes homeownership. That is, the reason that reweighting black homeowners and Latino homeowners to be 73 percent of their particular subgroups causes the wealth gap to close by nearly one-third is simply that wealthier people are more likely to buy homes.

This might seem like a nitpick of a point, but it is not. If you do not understand what is going on here, you might reach the conclusion that the way to fix the racial wealth gap is to put in place nudges that increase the homeownership rates of black and Latino families. And that is really not the right conclusion.

To see why this is the wrong conclusion, all one needs to do is scroll down a bit further in the Demos report:

[W]e find that the wealth returns to homeownership for Black households amount to $71,715—just 75 percent of the returns that accrue to white households. This difference of $24,533 means that for every $1 in wealth that a Black family builds as a result of homeownership, white families accrue $1.34. Meanwhile, the wealth returns to homeownership for Latino households amount to $62,647—just 65 percent of the returns that accrue to white households. This difference of $33,601 means that for every $1 in wealth that accrues to Latino families as a result of homeownership, white families accrue $1.54.

Homes are unique among wealth assets in that the race of the owner affects the rate of return. Likely due to the dynamics of residential segregation, housing assets owned by black and Latino families do not appreciate at the same rate as housing assets owned by white families.

However, for almost every other wealth asset you can think of (particularly financial assets), the rate of return will not generally vary based on who owns it. For instance, each share of Walmart stock pays the same dividends and goes up and down in value in the exact same way, regardless of whether it is owned by a white person, a black person, or a Latino person.

If your goal is to reduce the racial wealth gap, it probably makes more sense to encourage ownership of assets that have rates of returns that are not sensitive to the race of the owner. Yet, oddly, those that promote homeownership as the solution suggest we should put our effort into encouraging ownership of the only asset in which rates of returns are racialized in a way that penalizes black and Latino people.

Homeownership might be important for certain notions of the American Dream, but for the specific purposes of closing the racial wealth gap, it is one of the worst asset classes to focus your energies on.

  • Even if the rate of return from homeownership is worse for blacks than for whites, it could still be better than the rate of return of any other asset they could acquire, so it still might make sense to focus on homeownership.

  • If you can acquire a home, you can acquire a mutual fund account.

  • I’m just saying it’s plausible that our tax code is so encouraging of homeownership that it is still the best available investment option irrespective of the race of the purchaser.

    In which case a broader response might be either:

    1) The tax code shouldn’t be so beneficial to homeowners- that’s a consequence of antiquated ideas (American Dream, etc.)

    2) We should do what’s in our power to make the returns on homeownership not depend on race- address segregation, red-lining, etc.

  • The tax case is more compelling yes.

  • buermann

    At current mortgage rates you need something like 300K in mortgage debt for the interest deduction to get you across the standard deduction, and then you get some benefit from the others. Not that compelling.

  • Andrew

    Well, most people also pay state/local taxes, which gets you over the hump with much less mortgage interest. But our tax system is just dumb and absurdly complicated.

  • Ed

    Is it? The standard deduction would probably still be better than itemized deduction for the median black homebuyer.

  • jayseedubtoo

    But the home puts a roof over your head and replaces the rent check you’re paying better than the mutual fund does.

  • bill wald

    That might be true if one compared a condo and an apartment of equal valuation. Most people buy a house much larger their apartment.

  • jayseedubtoo

    :-) Regardless, that mutual fund still doesn’t come with a roof!

    (Actually, rent and mortgages frequently don’t have grand disparities in monthly costs–even if the house is physically bigger than the apartment–especially in situations in which two individuals renting separate apartments marry and join their funds into one house mortgage!)

  • JKR

    Homeownership is overrated. I don’t got all day to explain why. Private landlording should be abolished.

  • bill wald

    It depends upon how many kids you have. Further, a condo is a private home. Since we retired and all the kids are living on their own, we much prefer living in a condo.

  • S.L.Hawks

    I bought my first house when I was 21, and I live in it today It was probably “overrated” at the time, but my youthful foolishness ignored that. .I followed that by buying another 13 houses, all in near each other in an area considered by Realtors to be “undesirable”, before I turned 35. I have sold 4 at modest profit (which would have been HUGELY greater if I had waited until now, to sell to the Yuppie-Wannabes invading the West Side!) but’ still have the 10 to my name. I don’t ever need to work for somebody else, don’t need to get up & go to a job I hate, can take my time every day while I attend to my little ‘kingdom’ of 10 houses within walking distance, and cannot possibly understand what you mean when you claim that “homeownership is overrated”. I am happy, my tenants are happy, my family is happy, even my pets are happy. Even in crappy, ugly old Buffalo NY, we are happy. “Home Ownership” has made my life, along with my family’s and tenant’s lives, very pleasant indeed.

    Claims that owning property is “over rated” is just jealous Socialist nonsense. Get a job, earn some money, buy some land & a house and then tell us about how awful it is to have your own little bit of God’s Earth (or whomever’s Earth you wanna believe) under your feet.

  • S.L.Hawks

    please gits over yo “don’t got” at -it- tood an explains to us dumb folkses why ‘zackly youse be tinkin dats home ownaships be ova-rated ?

  • The Times piece is a classic example of race reductionism.

  • Freddie_deBoer

    … no it isn’t.

  • You’re right. I read a snippet and saw your quote and assumed it was like too many pieces I’ve read. I read the whole thing now. It’s better than that.

    But the bit you quoted is classic race reductionism. The assumption is the goal is to end the racial wealth gap rather than reduce the wealth gap for everyone.

  • KJ

    I might have misunderstood this, but I read the “wealth returns to homeownership” as the level of home equity, not the return on home equity. I think the footnote in the Demos report supports this: “Due to existing racial wealth disparities, as seen in the report, the median white household holds significantly more wealth than the median Black or Latino household; thus, the analysis compares typical households for each group, rather than households of similar wealth levels”. If my reading is correct, the same factors that drive higher homeownership among white households (mainly wealth) would reasonably drive higher levels of home equity (they buy more expensive houses, put more money down, pay off loans faster, have lived in homes longer, etc). That wouldn’t necessarily indicate that the return on capital (i.e. down payment and principal payments) is lower for minorities, although anecdotally that also seems to be likely.

    Also, couldn’t you argue that education is also a wealth asset where the race of the owner affects the rate of return?

  • David Schuler

    Savings rates are lower for blacks than for whites at all income quintiles. I don’t have an explanation for this but I suspect it goes a long way towards explaining reduced wealth and reduced rates of home ownership. Also, note that based on the original article’s own statistics, two-thirds of the “wealth gap” is not the difference in rates of home ownership.

  • Ed

    Only 25% of blacks have prime credit.

  • bill wald

    50 years ago Prof. Michael Harrington proposed that poverty and such was directly related to one’s “event horizon,” e.g. if can’t “see” one being alive in 20 years then one can’t plan for retirement in 40 years. I suspect this principle applies to “black” home ownership. In this century, “black” refers to a voluntary social/tribal contract as well as a skin color.

  • Henk

    Homes are unique among wealth assets in that the race of the owner affects the rate of return. Likely due to the dynamics of residential segregation, housing assets owned by black and Latino families do not appreciate at the same rate as housing assets owned by white families.

    My understanding of asset value is that the current price is a function of the future price. I also think the house owner is not important but rather the neighbors. Otherwise the price of a house will go down with a huge number by a black family buying it. This might be true but the study would not show this.

    I am wondering if the lower housing prices aren’t just another effect of black families having less wealth, therefore living in neighborhoods where the houses appreciate less.

  • Ed

    If you’re familiar with majority black schools or districts it’s quite easy to see why.

  • Ed

    The homeowbership rate for blacks as measured by the census has ranged from 34% in 1950 to 43% in 2017.

    A lot of stuff has happened in this period, there has been a massive reduction in black poverty for example. Yet no significant or equivalent growth in homeownership. Seems to me something else is going on besides nefarious racism.

  • Erika Kennel

    Some interesting points here, but a lack of historical context. The wealth gap started with homeownership and has built over the last 60 years. (The GI Bill single-handedly prompted a burst of homebuilding– from 114,000 new homes built in 1944 to a staggering 1.7 M just 6 years later.) People of color were completely locked out of this era that is now known as the Building of the Middle Class- mostly through returning vets using a stipend to buy their first house. For this article to carry any weight you would need to go back over the past 60 years and equalize assets for all racial groups if their families had owned property over the past 60 years, and passed it generation to generation. That is how you get clear very quickly on the value of owning property. Additionally, you can’t live inside a share of Walmart. An asset that is also meeting the largest monthly expense we all have, while building equity is a great thing. The stability that comes from being outside of a volatile rental market should be factored in as well. In Portland the average 2-bedroom apartment is $1600, my mortgage is less than that. In most urban settings someone who earns under $60,000 a year will never be able to pay their housing costs and buy stock. Desmond’s argument is much more comprehensive that Bruenig’s.