Black
Poverty Is Rooted in Real-Estate Exploitation
A new study in Chicago shows how the dream of homeownership was
converted into a poverty trap.
There’s a reason.
Photographer: Spencer Platt/Getty Images
Mark Whitehouse writes editorials on global economics and finance
for Bloomberg Opinion. He covered economics for the Wall Street Journal and
served as deputy bureau chief in London. He was founding managing editor of
Vedomosti, a Russian-language business daily.
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In this article
One question is -- or should be -- central to any assessment of
the state of America: Why, more than a century and a half after slavery ended,
does the typical black family remain so much poorer than the typical white
family?
A new study on
housing in Chicago illustrates a big part of the answer: Generation after
generation, the U.S. system of real-estate finance has enriched whites at the
expense of blacks.
Housing has long played
a crucial role in American wealth accumulation: People buy homes with
federally subsidized mortgages, build up equity and pass the assets on to
their children. But as recently as the 1960s, government policy excluded
blacks. In a practice known as redlining, the Federal Housing Administration
designated predominantly black neighborhoods as no-go zones for
government-insured mortgage loans. The FHA also wouldn’t guarantee loans for
new mixed-race developments: The presence of even a single black family was
enough to warrant rejection.
Hence, blacks had to find
other ways to obtain shelter. One was “contract for deed,” an arrangement
usually offered by speculators who bought properties expressly for the purpose.
It required a down payment and regular monthly installments from the
occupant, but that’s where the similarities to a mortgage ended. The sale price
and effective interest rate tended to be wildly inflated. The “buyer” assumed
all the responsibilities of a homeowner, including repairs and taxes, while the
“seller” retained title, along with the power to evict for missing even a
single payment. As a result, families who bought “on contract” didn’t
accumulate equity, and faced a long and precarious path to ownership.
Chicago became a hotbed of
contract-for-deed transactions in the mid-20th century, as large numbers
of blacks -- still brutally persecuted in the South -- moved to northern
industrial cities in the Great Migration. The city also saw one of the
country’s largest organized rebellions against the practice: The Contract
Buyers League, which filed two federal lawsuits seeking relief from the
contracts’ onerous provisions. The lawsuits failed, but for historians their
long lists of homes and tenants (cited as evidence) provide a rare and valuable
window into what was otherwise a largely undocumented and unregulated
phenomenon.
Now, researchers --
including Jack Macnamara, who as a young Jesuit seminarian helped organize the
League –- have tapped those lawsuits, along with municipal records and
the work of other
scholars, to come up with an estimate of how much this one predatory practice,
in one city, set back black families. Using data on sales and mortgage
rates, they calculated how much each family’s payments exceeded what they would
have been if the property had been purchased at the prevailing market price
with a conventional mortgage loan. They then added it up for all the contract
properties they could identify from the years 1950 to 1970.
The outcome: Black families were overcharged somewhere between
$3.2 billion and $4 billion (in 2019 dollars). The real estate agents and
investors who profited were almost exclusively white, so this represents a
direct transfer of wealth from one race to another. Worse, the contracts’
exorbitant terms, along with the lack of equity to borrow against, left black
families without the means to invest in their properties, contributing to the
physical decline of their neighborhoods.
The predation didn’t end in
the 1960s. It evolved. There was the FHA scandal of the
1970s, in which indiscriminate federal lending and outright corruption enabled speculators
to sell inner-city homes to blacks at inflated prices, resulting in
widespread foreclosures. There was the subprime boom of the 2000s, in
which blacks were steered into inappropriately expensive loans that enriched a
whole ecosystem of mortgage-industry professionals, but often left borrowers
with nothing but an eviction notice and a bad credit history. In the wake of
the subprime bust, investors including private-equity firms have again targeted
the same neighborhoods, buying up houses on the cheap and renting them back to
black and other minority tenants -- sometimes under
contracts very similar to those of the 1960s.
The investors involved
don’t necessarily act with racist intent. They exploit blacks because that’s
where the opportunity is. But the effect is the same: Black Americans
experience a completely different kind of finance, one that turns the dream of
homeownership into a poverty trap. This helps explain why, despite narrowing
racial disparities in areas such as education and employment, the gap in net
worth remains just as large as it was almost three decades ago.
A Persistent Gap
Source: Survey of Consumer
Finances
So if you ever find
yourself in a predominantly black neighborhood, wondering why everyone seems so
poor, know this: It’s largely because white people, possibly even you or your
ancestors, stole from them and their ancestors. The more Americans recognize this
deep, tragic flaw in the fabric of our society, the greater the chance that we
can find a remedy.
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