One of the biggest problems facing the nation is the wealth gap that exists between white and minority families. In fact, the typical white family in 2019 had eight times the wealth of the average Black family and five times the wealth of the typical Hispanic household, according to a Federal Reserve report on consumer finances.
So, it was fantastic to see Redfin’s report earlier this spring that showed the median home equity gain for families living in predominantly Black neighborhoods rose by 197% over the past two years. It’s a sign that the mortgage industry is one step closer toward creating a more equitable market. And hopefully, it’s a sign of progress that originators can build upon.
Those who purchased homes in primarily Black neighborhoods in 2019 saw a median gain in home equity of $59,000 by January 2021, while those who bought in primarily white neighborhoods gained $50,000, according to the Redfin report. Home equity increased even more for those who purchased homes in Hispanic neighborhoods ($67,000) and Asian neighborhoods ($79,000).
For Black homeowners, the increase in home equity marks an about-face from 10 years earlier. During and after the Great Recession, the values of homes owned by minority families were hit much harder compared to that of white-owned homes. According to the Economic Policy Institute, the net worth of the typical household fell by 40% during the recession, but the net worth of Black households fell by 53% compared to only 17% for white households.
Any significant gain in home equity for Black homeowners is the first step toward narrowing the wealth gap, particularly since homeownership is the primary vehicle for generating wealth among all households. But the growth in home equity is about more than just numbers. For many African Americans, especially those who are the first generation of homebuyers in their families and have no access to generational wealth, it is truly life changing.
Rising home values are giving many Black families their first taste of financial freedom as they now they have the ability to tap into their equity to pay off credit cards or other loans, which improves their credit profile. Equity can be used to make home improvements that further increase home values. And it can used to pay for a child’s college education or to launch a business. Not only does the building of home equity provide wealth, it can be used to pass on the same opportunities to future generations.
Another positive aspect behind the Redfin report is that many of the homes Blacks are buying are located in neighborhoods that were formerly redlined by lenders, which means the appraisal values of these neighborhoods are starting to catch up with those of predominantly white neighborhoods. But while growing home equity is something to be celebrated, there is still work to be done.
For one, Black homeowners still lag behind their white counterparts when it comes to total home equity. According to Redfin, Blacks who bought homes in 2019 had a median of $89,000 in home equity this past January, significantly below the median of $113,000 for white homeowners.
Also, the recent jump in home equity was only great if you are one of the 44% of African Americans who currently own a home. It’s not so great for the 56% of Blacks who are not homeowners. In fact, the homeownership gap between Black and white families is greater today than it was in 1968 when the Fair Housing Act was signed.
Rapidly rising home values could make this gap worse, and it also could increase rents for those who are already struggling to come up with a downpayment for a home loan. Because minorities rent at higher rates than white families, this demographic has been hit particularly hard. That’s even more true today, as the COVID-19 pandemic has been more financially devastating for many minority households.
Yet another troublesome aspect is that rising home values are leading to the gentrification of predominantly minority neighborhoods in urban areas. This trend has already been happening for decades in places like Oakland and Brooklyn, New York, and is now taking place in cities like Atlanta and Austin.
And while rising home equity opens the door to refinancing, fewer Black homeowners actually refinance their mortgages compared to whites. According to a recent report from the Federal Reserve Bank of Atlanta, between 2005 and 2020, the average mortgage rate paid by Black and Hispanic homeowners was nearly 50 basis points higher than that of white homeowners, yet they refinance their mortgages less often than whites, who are more likely to take advantage of lower rates.
Still, the increase in home equity for Black households is excellent news. Fortunately, there are a number of positive developments taking place that could help level the playing field further by increasing access to homeownership and the benefits of rising home equity.
For example, during her confirmation hearings, incoming U.S. Department of Housing and Urban Development Secretary Marcia Fudge pledged to expand homeownership to families, “especially families of color who have been systematically kept out in the cold across generations, to buy homes and punch their ticket to the middle class.” There’s also a bill circulating in Congress that would specifically target first-generation homebuyers by offering $20,000 toward downpayment or closing costs.
In addition, the federal government is working on language to ensure downpayment assistance is a priority for borrowers who are first-time homebuyers. While the outcomes of these efforts remain unknown, it’s great to see that the government is taking this issue seriously.
The next conversation that should happen involves how to decrease the large amount of student loan debt that remains a major hang-up for many minority borrowers. A relative lack of family wealth is the primary reason why many minorities carry a heavy student loan debt burden. Currently, for every $100,000 in student loan debt, lenders apply $1,000 per month to a borrower’s debt-to-income ratio. This can disqualify about 10% of minority families from getting a mortgage.
In the meantime, mortgage originators can play an instrumental role in helping more Black families achieve their dreams of homeownership and start taking part in wealth creation. One of the best ways is to partner with entities that make downpayment-assistance programs available to minority borrowers who lack generational wealth.
Another way for originators to help is by educating past clients about the benefits of refinancing. Many first-generation homeowners may not even be aware of what their home equity can do for them. Originators tend to not be shy about marketing refinance products to existing clients. But because minority homeowners are less likely to refinance than white homeowners, a more personal and educational approach might be more effective than the typical email drip campaign.
At the end of the day, more Black families building wealth through home equity is a step in the right direction. Originators now have a great opportunity to build on this trend and fight wealth inequality by helping more families of color enjoy the fruits of homeownership. The mortgage industry — and indeed the country — will be the better for it. ●