Why Black and Latino homeowners profit less than whites
In the U.S., Black home ownership rates doubled from about 23% in 1920 to 45% in 2021. Yet the median white U.S. household still holds about 10 times the wealth of the median Black household, and this massive wealth gap has barely budged.
Associate Professor Amir Kermani and a colleague analyzed massive datasets capturing 6 million home ownership spells from 1990 to 2017 to better understand why the wealth gap is so persistent.
They found that Black and Latino homeowners across all income levels make significantly lower returns on owning a home than whites, on average: 44% and 22% lower, respectively, when compounding the average of all types of sales over ten years. But surprisingly, it’s not because of differences in prices or appreciation rates in their neighborhoods.
In fact, when it comes to regular home sales, minority sellers profit about as much on average as whites—regardless of the racial makeup of the neighborhood. Almost all of the disparity is driven by higher rates of distressed sales among Blacks and Latinos, which wipe out a huge chunk of potential wealth and drive down average returns.
Minority homeowners are 5% more likely to experience a distressed sale—which includes foreclosures and short sales, where a lender forces a sale for the mortgage balance. They are also more likely to live in neighborhoods where forced sales carry a steeper price discount, probably because there are fewer buyers, Kermani says.
“Higher job instability and fewer liquid assets make people very vulnerable to a temporary shock and increase the chances of losing all the wealth they’ve accumulated in their house.”
“If we could equalize the rate of return on homeownership for Blacks and whites—without any increase in home ownership—we would reduce the Black/white housing wealth gap by about 40% at retirement,” says Kermani. “If we were able to equalize both home purchases and the rate of return on ownership, we’d reduce the gap by 50%.”
But why are those in minority groups more likely to lose their homes in forced sales? The study identifies deep-seated disparities in liquid wealth, especially after age 50, and job instability as the culprits. Blacks and Latinos are much more likely to lose their jobs than whites—across all sectors, education levels, geographic locations, and income levels.
“Even Black households with income over $100,000 are still about 5% more likely to experience a layoff,” Kermani says. “Higher job instability and fewer liquid assets make people very vulnerable to a temporary shock and increase the chances of losing all the wealth they’ve accumulated in their house.”
The main problem seems to be rooted in the labor market, and the main fix is to create more stable jobs and ways to build liquid assets, says Kermani. “But in the short term, one solution is more flexible mortgage contracts and more mortgage modifications,” he says.
He estimates that receiving a modification after three months of failing to make mortgage payments can reduce chances of a foreclosure by 37 percentage points and increase a homeowner’s average annual returns by nearly 9 percentage points.