This is the fourth episode of our new video series covering Implicit bias principles and provides an overview of new continuing education (CE) requirements that apply to real estate agents and brokers whose license expires on or after January 1, 2023.
This episode deconstructs the source of the property gap and the corresponding wealth gap. Click for it previous episode serial.
A source of wealth
Home ownership is the main source of wealth for American families. To increase household wealth, the US government subsidizes and encourages home ownership through various tax incentives and mortgage programs, such as:
- mortgage interest deduction (MID);
- Low down payment mortgages insured by the Federal Housing Administration (FHA);
- low caps on capital gains tax; and
- Proposition 13 (Prop 13) in California.
Yet, despite these incentives, some groups find it harder to become homeowners than others, resulting in a huge wealth disparity between racial and ethnic groups.
Median household wealth in 2019 is:
That is, for every dollar held by white households, black households hold only 12 cents and Latinx households hold only 21 cents.
Although all types of asset ownership are more important for white households, the majority of these racial wealth gap can be explained by a decrease home ownership rate among black households and other minorities.
Why Minority Households Avoid Homeownership
If home ownership is the key to wealth, why aren’t more minority households buying homes?
If past experience has taught minority communities anything, it is that for Black and Latino households, home ownership is not the “safe investment” that many vehemently proclaim.
The National Bureau of Economic Research (NBER) published a study on the impact of the 2008 crisis Millennial boom And subsequent Great Recession on the homeownership rates of black and Latino households compared to white households (Asian households were excluded from the study). [Bayer, Patrick; Ferreira, Fernando & Ross, Stephen L. (2013) The Vulnerability of Minority Homeowners in the Housing Boom and Bust]
He found the 2009 foreclosure crisis had a greater effect on black and Latino homebuyer communities than on white communities. The share of homeowners who lost their home to foreclosure during this period was:
- more than 1 in 10 black and Latino households; and
- only 1 in 25 white households.
Why were black and Latino homeowners more than twice as likely as white homeowners to lose their homes? Three factors converged to increase the likelihood of seizure:
- aggressive subprime Where predatory loan;
- high debt-to-income ratios (DTI) authorized by lenders; and
- high cases of job instability.
Millennium Boom: the perfect storm for minority buyers
The most dangerous factor that increases the likelihood of foreclosure for Black and Latino homebuyers is predatory loan.
The biggest recognized case of predatory lending has been settled by Bank of America (BofA) in 2012 for their subsidiary, Countrywide, discriminatory lending practices. BofA paid $335 million to approximately 200,000 victims of Countrywide’s actions.
Countrywide discriminated against minority homebuyers in two ways, by:
- loading higher fees minorities than white homebuyers with equivalent qualifications; and
- steering minority homebuyers in subprime mortgage products, even though the targeted homebuyers had equal or better credit histories than other white homebuyers who did not have bad mortgages.
Higher initial fees and subprime mortgages prompted minorities targeted by Countrywide to ultimately pay significantly more than similarly qualified white home buyers. As a result, when the housing market and economy crashed in the wake of the millennium boom, it was harder for minority home buyers to make mortgage payments than it was for white homeowners who took out our mortgages with Countrywide – the mortgages themselves were already less favorable and posed more risk.
Lenders have also deliberately encouraged buyers of minority homes to take on more debt than they could reasonably afford – in fact, steering towards a mortgage product with a higher DTI that would provide the greatest benefit to the lender. The higher a homebuyer’s DTI, the greater the risk and the less the buyer will be able to make future mortgage payments.
The lenders of Millennial boom era didn’t seem to care about this axiom and knowingly pushed minority homebuyers into mortgages they were unable to pay. This resulted in higher up-front costs for lenders, who dumped the risk on other investors by selling the bad mortgages into the secondary mortgage market – out of sight, out of mind.
Finally, homeowners were more likely to lose their homes after the Great Recession due to the statistical fact that black and Latinx heads of households are more likely to be employed in occupations more sensitive to economic downturns, such as manufacturing and other hourly jobs. In other words, the heads of these households are more likely to lose their jobs than their white counterparts.
Job Loss and inability to pay are the main reasons homeowners default on their mortgages. Other financial shocks also contribute to the decision of strategic default, which is generally the last resort of a household in difficulty. [Gerardi, Kristopher; Herkenhoff, Kyle F.; Ohanian, Lee E. & Willen, Paul. (2015) Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default]
The California real estate problem
California is a large, diverse state. Nearly 40% of the population identifies as Latinx (Hispanic or Latino/Latina), according to the US Census. About 16% identify as Asian and 7% identify as Black or African American. Consequently, discrimination in the mortgage and housing markets has a significant influence on our state.
Another problem for minority buyers, not mentioned in the NBER report, is the discriminatory behavior practiced by some real estate agents.
Compared to similarly qualified white customers, the U.S. Department of Housing and Urban Development (HUD) finds that real estate agents post fewer rental and sale listings to Black, Asian, and Latino customers. [Aranda, Claudia L.; Levy, Diane K; Pitingolo, Rob; Santos, Rob; Turner, Margery Austin; Wissoker, Doug; The Urban Institute. (2013) Housing Discrimination Against Racial and Ethnic Minorities 2012]
Why do some real estate agents tend to offer fewer listings to minority buyers than their white counterparts?
It’s usually implicit bias on behalf of the real estate agent. For example, some real estate agents may think they are doing their black clients a favor by only showing them homes in neighborhoods that are mostly populated by other black residents (an illegal practice). Or agents may not realize they are slower to respond to requests from minority buyers, with less urgency than they would normally provide.
It perpetuates the neighborhood segregationwhich limits minority households’ access to better jobs, better schools, and other resources that disproportionately benefit white households.
The only way to stop a California real estate agent from discriminating against minority customers? The California Department of Real Estate (DRE) can enforce anti-discrimination laws. However, the DRE will only prosecute an agent for ethics violations after receiving a first formal complaint.
In the event of discrimination, most buyers, sellers and tenants do not know what to do when approaching the DRE. It is therefore up to fellow agents and brokers to report discriminatory practices to the DRE. Injured persons can file a complaint on the ERD website using their online complaint form.
Editor’s note – first tuesday was one of the first schools in California to gain DRE approval for the new implicit bias training and expanded fair housing course.
To register, go to the order page.