Gentrification and the Racial Wealth Gap
Daniel Watchorn | November 5, 2020
Wealth inequality in the United States and across the world is reaching a crisis point. In 2016, the top 5% of families owned 66% of all wealth in America, whereas the bottom 90% owned only 21%. This divergence has been growing since the late 1980's and the COVID-19 pandemic has only exacerbated this trend further. What is perhaps more concerning than the inequality between the wealthy and the average, is the inequality along racial lines.
Depending on the source you read, the median wealth of an American white family in 2016 was between $146,984 and $171,000. The median wealth of black families? Between $3,557 and $17,150. Much like the overall wealth gap; the racial wealth gap is growing. There are many factors that can help to explain why this wealth gap continues to exist, however, among the largest of these is homeownership.
A significant proportion of the overall wealth of families comes from homeownership, and the importance of homeownership as a proportion of a household's total wealth is greater for lower-wealth households. In other words, the lower the wealth of a household, the more important the value of their home is to their overall net-worth(1). By reviewing the realities of homeownership for low-income and racialized communities, we can better understand both what planning tools can be used to solve the problem and how to use those tools in an effective way so as to not cause other negative externalities.
A History of Homeownership
The federal government began making efforts to promote homeownership for the middle class in the late 1910s, and began instituting strong policies in the 1930s with the introduction of Franklin D. Roosevelt's New Deal. For many Americans, these policies worked.
The homeownership rate was 45.90% in 1910, and 55.0% in 1950. While these numbers may not seem significantly different, rapid urbanization was occurring at the time. In 1910, the population was 54.15% rural, but in 1950 it was 36.02% rural. With no other external factors, it is to be expected that the homeownership rate would have fallen, since rural areas have much higher rates of homeownership than urban areas do.
This also coincided with the end of World War 2 and the birth of the suburban boom. The federal government instituted a number of additional policies to encourage homeownership for the middle class and returning vets. Most of these policies encouraged, and even required, large suburbs to be built.
Unfortunately, the policies that were instituted were virtually all either implicitly, or explicitly, racist in their design. For example, an innovation that was brought forward at the time was the concept of federally insured mortgages. Prior to this, mortgages offered by private lending institutions would often require a 50% down payment and the monthly interest payments that the homeowner made were not amortized - meaning the monthly payments did not increase the homeowner's stake of ownership in their house. Instead, they would have to make additional payments, on top of their interest payments, to build their ownership stake, and would have to pay off the loan in full within 5-7 years.
The Federal Housing Administration (FHA) was created in 1934 to address this matter, and so created this concept of FHA insured mortgages. By insuring up to 80% of a mortgage, the FHA took on virtually all of the risk of lending - if the homeowner were to default on their loan, the bank would still be able to collect the remaining value of the mortgage from the government instead of the borrower. These insured mortgages now only required 20% down payments, allowed for amortization, and had 20 year terms. In turn, far more middle class people were able to purchase homes than ever before. Unfortunately, FHA insured mortgages were only offered to white borrowers; the FHA would not insure the mortgages of black borrowers. They stated that the risk of default or significant property value reduction was too great for black households, regardless of their credit. As a result, even though there were a number of supreme court decisions that made explicitly racist lending policies illegal, this practice continued at least into the early 1960s.
Another example from this time period is Veteran's Administration (VA) financing. One of the main objectives of the Veteran's Administration was to provide new suburban housing for veterans returning home from World War 2. The VA was involved in the provision of low-interest, no down payment mortgages to individuals and would also guarantee funding for large developers. Developers would apply to the VA for speculative funding of large suburban developments geared towards returning veterans. Levittown, New York is an example.
The VA/FHA funding of both post-war suburb construction and mortgage insurance was only granted to developers if they guaranteed they would not sell homes to black families. In fact, black people were almost entirely left out of the post-war housing effort made by the federal government. The only significant housing that was offered to black people at that time was fully segregated public housing.
In short, the largest effort ever made by the federal government to promote affordable homeownership explicitly excluded black people solely based on race. White people were given an extreme advantage to build wealth through homeownership that began in the 1910s, and is a significant reason as to why there is a continuing disparity in homeownership rates and property-based wealth across racial lines today.
Note: The information in this section is largely informed by the book The Color of Law, by Richard Rothstein.
Homeownership Today
First and foremost, homeownership rates, defined as homes that are owned by their occupants, based on ethnicity are as follows (Q1 2020):
White: 73.7%
Hispanic: 48.9%
Black: 44.7%
Other Race: 59.4%
Two or more races: 52%
The homeownership rate among whites is 1.65 times higher than it is for blacks. This, however, does not explain why the median white family's wealth is roughly 10 times higher than for median black families. There are many explanations that are not related to housing, however housing and homeownership have an outsized impact on overall wealth, as discussed above. Regarding home based wealth, perhaps the most significant reason for the wealth disparity is time itself. Since white families were afforded such a large head start, there is an entire generation of home-based wealth accumulation that white families enjoyed and that black families didn't.
Another explanation for this disparity is that owner-occupied homes in predominantly black neighbourhoods are simply undervalued in comparison to homes in white neighbourhoods. A study conducted by the Brookings Institute estimates that owner-occupied homes in majority black neighbourhooods are undervalued by $48,000 on average. Even when comparing neighbourhoods with similar amenities, where the racial makeup of the neighbourhood is the only significant difference, the homes in predominantly black neighbourhoods are worth 23% less than in white neighbourhoods.
This disparity is further exacerbated by mortgages. A number of different studies have been conducted to better understand how race may affect one's mortgage rate and payments. It was found that mortgage rates for black families is between 21 and 42 basis points higher than it is for white families(2)(3). Non-white hispanics were found to have been charged between 13 and 15 basis points higher. Applying these numbers to a $500,000 mortgage with a 10% down payment and a 2.00% interest rate, the white family in this scenario would pay $125,431 in interest across the life of the loan. A black family with the same terms would be paying between a 2.21% and 2.42% mortgage rate, which translates to between $139,630 and $154,020 in interest payments.
The previously referenced study by Boehm and Schlottmann(1) explores these factors, among others, to analyze the expected housing based wealth accumulation for high-income white families, high-incomes minority families, low-income white families and low-income minority families. Over the course of a 9 year period, it was modelled that a median high-income white family's housing wealth would appreciate 1.32 times faster than a high-income minority household. The disparity between high-income white households and low-income minority households is 2.6 times.
So, white families have had a significant historical advantage over black and racialized families in homeownership rates and wealth accumulation. This advantage not only persists to this day, but is continuing to widen. Properties in racialized neighbourhoods tend to be undervalued in the market, appreciate at a slower rate, and are more expensive to finance for racialized homeowners than for comparable white neighbourhoods and white homeowners. The question is, then, what can be done about this?
Local Solutions
There are a number of policies that could be enacted by central governments to address these challenges, especially relating to solving the gap in homeownership rates. Central policies, however, will not be able to solve the racial wealth gap alone. The persistent undervaluation of homes that are owned by black families plays a major factor in the wealth gap. Since property values vary widely by location, it is up to local agencies to take the lead in solving this part of the issue.
When designing a solution, it is critical to properly understand the issue. In the simplest terms, the issue is that properties that are owned by black families are undervalued in the market. This undervaluation is likely caused by a number of factors, including racial bias, carry-over effects from Jim Crow laws, the perception of negative attributes in low-income neighbourhoods, etc. These factors are all rooted in the prejudices of potential buyers. Again, even when controlling for all neighbourhood amenities, predominantly black neighbourhoods are undervalued. Governments need to find a way to improve the perception of quality of these neighbourhoods, so that the perceived quality outweighs the internal prejudices of potential buyers. If successful, these prejudices will be neutralized over time.
There are a number of ways to do this. First and foremost would be improving access to transportation. There are many studies that have been conducted which observe the impacts of public transit on land values. Introducing public transit to a neighbourhood does not guarantee that land values will increase, but in the majority of cases there is a strong positive correlation between public transit and land value. This correlation is even stronger when good urban design is practiced. Neighbourhoods with compact built forms, higher densities and good pedestrian connectivity have higher land values(4), which is especially true when public transit is present.
When governments take the time and invest properly in a neighbourhood, they can influence the value of lands within it. Improving the built form and neighbourhood amenities is a worthwhile exercise that makes neighbourhoods more attractive. Adding a multi-use path or redeveloping a surface parking lot will not immediately solve the property value disparities in low-income neighbourhoods. But, making good design choices and investing in desirable public amenities will boost values over time. This sounds quite simple, but unfortunately, there is another externality associated with these interventions: gentrification.
Gentrification
Gentrification is a term that has been used very widely and very differently over the course of time. The dictionary definition is: "a process in which a poor area (as of a city) experiences an influx of middle-class or wealthy people who renovate and rebuild homes and businesses and which often results in an increase in property values and the displacement of earlier, usually poorer residents." In practice, gentrification is commonly considered to occur when high income white yuppies move into low income and racialized areas of a city in droves, drive up property values and push out the existing low income residents. Along with the yuppies come Starbucks, cupcake shops and dog grooming salons, which kick out ethnic restaurants, community spaces and fabric stores. This is often told as the suburbanization of an urban neighbourhood, at least in spirit. A more extreme characterization of gentrification would be that of modern day colonialism. White people find a place filled with non-white people whose culture they enjoy, move to that place, displace the existing residents, then claim the eclecticness of the neighbourhood for themselves (after, of course, ensuring that their own preferences of local businesses are met).
A famous example that can be looked to is Harlem, New York City. Harlem is one of the most historic black neighbourhoods in the United States. Historically it was a much lower income area in comparison with surrounding neighbourhoods, and had notoriously poor living conditions into the 1980s. This made it a ripe candidate for gentrification, especially in a scorching hot real estate market like New York City. Accordingly, gentrification has likely been occurring there since the mid 1980s, and the loss of historical buildings and cultural institutions has radically changed the neighbourhood. An excellent opinion piece in the New York Times, written by Michael Henry Adams, provides insight into the experience from the point of view of a long time resident. A quote that sums up his argument is:
"A few ask, isn’t this a good thing — or, at least, the price of a good thing? 'You and all the others had better get over your grieving, we need Whole Foods,' said my friend and fellow Harlem resident James Fenton, the noted English writer. But this is the problem with gentrification — what James, with all due respect, doesn’t get, but what that boy on Eighth Avenue did. For so many privileged New Yorkers, like James, Whole Foods is just the corner store. But among the black and working-class residents of Harlem, who have withstood red-lining and neglect, it might as well be Fortnum and Mason. To us, our Harlem is being remade, upgraded and transformed, just for them, for wealthier white people."
Based on this, we should rightly look to avoid gentrification at all costs and find a different method for boosting property values in low income or racialized neighbourhoods. The question is, though, is that characterization of gentrification accurate? Or, can anything be done to reap the benefits of gentrification without experiencing all of the negative impacts?
Beginning with the gentrifiers, the implication that their actions are being taken with malice in their hearts is a mischaracterization. While most gentrifiers are acting in their own self interest when choosing to move to a gentrifying neighbourhood (be it financial, social, cultural, etc.), that is simply a factor of human nature. We all want to improve our own lives; people choosing to move to a gentrifying neighbourhood are acting on their own personal judgement of what is good for them. It is unfortunate that many gentrifiers either don't realize or don't care about the negative externalities that their presence causes in these scenarios - gentrifiers should take more care to ensure that they are not harming an existing community.
However, without re-writing the rules of society, gentrifiers can't be stopped from moving to low-income or racialized neighbourhoods if that is what they wish to do. It took a long fight to eliminate race-based policies in housing markets and it would be incredibly challenging to re-introduce them in a manner that would positively impact black and racialized residents without causing a political firestorm.
Turning to the existing residents - there is no doubt that the loss of local culture has a significantly negative impact, especially so in a neighbourhood as iconic as Harlem. Tight knit communities are formed thanks in large part to the presence of ethnic businesses, churches and other communal spaces. The removal of those places will erode the fabric of the community over time. However, this erosion is a failure of local government to act, and not the fault of the gentrifiers. There are many policy tools at the disposal of our local leaders, historical preservation being a key option, that could be used to save what is important and inform how development could be carried out better. The opinion piece above rightly points out that mayor after mayor in New York has failed to adequately protect Harlem.
Coming back to homeownership and family wealth; gentrification has caused a significant increase in property values in Harlem. From 2009 to 2017, values of townhomes in the neighbourhood rose by 15% per year. While ownership rates in Harlem (and New York generally) are quite low, those who do own their own property have been enjoying significant gains in their wealth. If this type of property value increase happened in a neighbourhood where the ownership rates were at least in line with the national rates, a dramatic rise in the wealth of a significant portion of the black and racialized community would occur.
Likewise, the new development that happens in a gentrifying neighbourhood actually improves affordability for renters, not the opposite. A common complaint both in Harlem and in gentrifying neighbourhoods generally is that the only type of new buildings being built are luxury apartments/condos that are far too expensive for the original low-income and racialized residents. While this is likely true, it is possible that rent control, a policy that is meant to help low-income renters, is what is causing this, and not the process of gentrification itself.
Note: The information in this section is largely informed by the book Gentrifier, by John Joe Schlichtman, Jason Patch and Marc Lamont Hill.
Rent Control
Economists have been discussing rent control for a long time and have generally come to the same conclusion: rent control ends up increasing the average rent in a city over time. There are a number of reasons for this. For one thing, by capping the potential return on investment for new buildings, developers tend to be less likely to build rental buildings, so as the population grows, the proportion of residential units available for rent goes down and therefore the price for new leases goes up.
Secondly, a study conducted by Diamond, McQuade, and Qian reveals that the likelihood of rental buildings being converted to condominium/strata ownership is much higher in a rent controlled environment. Rental buildings were also demolished in favour of constructing new ownership style buildings at a higher rate. That study further reviewed the effects on the existing tenants when rent control was implemented (in San Francisco). It was observed that existing tenants were much more likely to remain in their units after rent control was adopted - meaning that the displacement of residents was lower than compared with not having rent control. Regarding displacement related to gentrification, this is good! However, it was also found that, even with rent control, only 10% of the original population remained in place after 10-15 years. Not only this, once the original tenant moves out, the landlord will increase the starting rent higher than when there is no rent control. This, in turn, actually accelerates gentrification, as only higher-income people are able to move into existing buildings. This is in line with what was observed in Harlem, where only luxury-type buildings were built and therefore only high-income people are able to move into the neighbourhood.
This poses a difficult problem. Rent control does temporarily solve one of the core issues posed by gentrification - the displacement of low income tenants. Over the long term, however, it has disproportionately harmful impacts on that exact same group. By discouraging the construction of new mid-income rental buildings, the supply of units in that price range never increases, so the competition for units becomes more intense as demand increases, new leases are started at a higher price point, and affordability gets worse.
Smart Gentrification
So, policies must be designed, authorized and implemented which encourage the increasing of property values within low-income black and racialized neighbourhoods while allowing for an appropriate level of development to maintain the supply of affordable rental units, and protecting the local culture. Some possible solutions include:
Compensation for redevelopment based evictions: Rather than permitting landlords to simply evict their existing tenants when they would like to redevelop the property, require that the tenants be compensated at a fair value for the troubles associated with losing their place of residence. The compensation rate would have to be set such that it does not discourage redevelopment while still providing a fair sum to the tenant. This would boost the wealth of the existing tenants and make it easier for them to remain in the neighbourhood, while not having the disincentives for landlords associated with strict rent control.
Guarantee a unit to existing tenants in redeveloped buildings: If regulation 1) is not in place, the landlord would have to guarantee a (similar) unit to the existing tenants in the new building if they want it. Those guaranteed units would have a temporary (5-10 years) rent control only on them so as to not immediately price out the existing tenants should the new building be upscaled. The rest of the units could be rented at the full market rate, and therefore provide further financial incentives for the redevelopment to occur. By only having rent control regulations on those existing units, landlords with long term views would not be discouraged from redeveloping rental buildings and existing tenants wouldn't be immediately priced out.
Relax zoning restrictions for density: Making it simpler to add more units to existing buildings will make it easier to increase the overall unit count. This would make it easier for lower income homeowners to get a greater value from their property, and increase the unit count in the neighbourhood. The right amount of increased density would vary from one neighbourhood to the next to align with the local context, but broad swaths of single family detached zoning is not conducive to housing affordability.
Improve community consultation: Preserving the neighbourhood culture and character requires community consultation. When important decisions are made, it is critical that the voice of the residents is heard. The financial position of residents should not influence their ability to have their voice heard - all groups must be heard fairly. A balance must be struck, however, between NIMBY-ism, community control, and development interests.
Inclusionary zoning: Allow developers to increase the number of units that they can build if they provide affordable housing. This could also be a requirement for redevelopment. Inclusionary zoning will not necessarily increase the affordability of market housing, but an increase in the supply of regulated affordable housing has significantly positive impacts on low-income people. This will also allow those low-income people to stay in the neighbourhood more easily.
Guarantee commercial units to existing tenants in redeveloped buildings: Local businesses play a significant part in the cultural makeup of a community. In many cases, businesses don't return when the buildings they occupy redevelop. Guaranteeing them a spot in new buildings will ensure that the culture that is created by their presence is not lost in an evolving urban context.
This is not an exhaustive list of what can and should be implemented to induce smart gentrification. There are also many different central policies that should be enacted to assist with this process.
To Close a Wealth Gap
The racial wealth gap has a long and complicated history. A strong effort will be required from all levels of government to solve this issue. Local governments should invest more in new infrastructure and community building projects in low-income and racialized neighbourhoods to boost property values. At the same time, smart gentrification policies must be implemented so that the benefits of the investment by government can be fully enjoyed by the existing community. The implementation of a smart gentrification policy regime could play a major factor in boosting the wealth of many racialized families, and in turn would assist in closing the wealth gap.
(1) Boehm, T., & Schlottmann, A. (2008). Wealth Accumulation and Homeownership: Evidence for Low-Income Households. Cityscape, 10(2), pp. 225-256.
(2) Boehm, T., & Schlottmann, A. (2006). Mortgage Pricing Differentials Across Hispanic, Black, and White Households. U.S. Departmont of Housing and Urban Development
(3) Cheng, P., Lin, Z., & Liu, Y. (2015, July). Racial Discrepancy in Mortgage Interest Rates. Journal of Real Estate Finance and Economics, 101-120.
(4) Bartholomew, K., & Ewing, R. (2011). Hedonic Price Effects of Pedestrian and Transit-Oriented Development. Journal of Planning Literature, 18-34.