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.