Housing and the Racial Wealth Gap: A Historical Overview

According to a recent report, the median white household has 13 times the wealth of the median black household, and more than 10 times that of the median Latino family. The wealth gap is just one of a multitude of indicators that reveal a country still deeply unequal along racial lines. This data begs for explanations of why and how? Our public discourse offers only frustration in its answers. Liberals often harken all the way back to slavery and elide the century and a half between then and now. Conservatives typically blow a familiar dog whistle and point to a “culture of poverty” among African-Americans, one that doesn’t value the characteristics — hard work, education, frugality — necessary to climb the socio-economic ladder. Despite their differences in intent, each explanation is both inadequate and lacks historical perspective. While there are certainly a multitude of factors that contribute to the racial wealth gap, housing is a primary contributor. Over the past 80-plus years, housing policy has consistently provided upward mobility for white families while impoverishing black ones. What follows is a brief historical overview of the major episodes in racialized housing policy, focusing on its contribution to the racial wealth gap.

In the early 1930s, as the Great Depression ravaged the American economy, the housing market was near collapse. By 1933, roughly half of all mortgages were in default. In the five years prior, residential property construction had ground to a halt, declining 95 percent since 1928. As a result, the construction industry had some of the highest unemployment rates in the entire labor force. President Franklin Delano Roosevelt, as part of his larger New Deal program, sought to put construction workers back to work by stimulating the housing market. The results were two programs — the Home Owners Loan Corporation (HOLC) and the Federal Housing Authority (FHA) — which together sought to slow the tide of foreclosures and encourage new home purchases and construction. The federally-backed mortgage insurance the FHA offered privately issued mortgages guaranteed banks would receive full repayment, with interest, from the federal government in cases of homeowner default. This amounted to the single largest government housing handout in the history of the republic. With banks’ risk all but eliminated, banks lowered collateral and down payment requirements and extended the amortization of loans, making homeownership affordable for just about any American with a job; any American that is, who was white.

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Over the next three decades over 11 million families bought homes backed by the FHA, transforming the American public from a nation of renters to a nation of homeowners. African-Americans, and other communities of color, however, could not profit from this government largesse. As part of their nationwide program, the FHA categorized every neighborhood in the country on a color-coded desirability scale from Green (most desirable) to Red (least desirable). The government could not, after all, insure any mortgage in any neighborhood in the country, so the rating system created nationwide standards for assessing residential tracts. Those neighborhoods that were, for example, too close to pollution-producing factories were designated red, or “redlined,” and therefore disqualified from FHA-backed mortgages. However, the primary way neighborhoods earned red designation was the presence of black residents. Black and brown neighborhoods across the country were redlined. The presence of a single African-American, in fact, was enough to earn a red designation and be disqualified from FHA backing. In California,

It’s important to highlight that HOLC and the FHA did not invent the idea of residential segregation. Restrictive housing covenants enforced residential segregation for decades prior to the Roosevelt presidency. What the FHA did, however, in using racial homogeneity as a pre-requisite for a green or blue designation in their "Underwriting Manual," is make residential segregation federal policy. This meant that regardless of a white homeowner’s personal beliefs regarding racial equality, the value of their home was tied to their willingness to keep their neighborhood exclusively white. Through redlining, the federal government put civil rights at odds, rather than in alignment, with home appreciation, thereby aligning white homeowner’s economic interests with white supremacy.

Hundreds of thousands of southern blacks migrated to redlined neighborhoods on the West Coast during World War II. Five million blacks left the south between 1940 and 1970. They fled the racial violence of Jim Crow segregation in search of better economic opportunities in the war industry and to satisfy the gargantuan demand for war materiel. Long Beach, for example, was a major player in FDR’s “Arsenal of Democracy.” The Douglas Aircraft Company, headquartered in Long Beach, built over 30,000 aircrafts for the war. In the Bay Area, The Kaiser Shipyards in Richmond built nearly 750 “Liberty Ships” for the war in the Pacific. This “Second Great Migration” largely cultivated the black communities in California cities like Los Angeles, Oakland, and Long Beach. The black population of Los Angeles County, for example, increased roughly ten-fold from 1920 to 1950, from under 20,000 to nearly 220,000. Up north, Oakland’s black population rose five-fold in the 1940s alone, from around 8,000 to over 42,000 by decade’s end.

These newly arrived African-Americans moved into segregated redlined neighborhoods. They were denied access to the government subsides that allowed thousands of their white co-workers to purchase their first home. Without the assistance of the FHA, few African-Americans could afford to purchase a home. Those who did, did so largely in redlined neighborhoods, where their investment was sure to appreciate at a much slower rate, if at all, than their white counterparts who bought in green and blue tracts.

The color-coded FHA "Underwriting Manual" maps significantly shaped the racial geography of the post-war decades. Furthermore, by effectively dictating where billions of investment dollars could and could not flow, the federal government largely dictated the socioeconomic character of those racially segregated neighborhoods. Redlining made black and brown neighborhoods undesirable to investors and therefore ensured they would remain impoverished. Green and blue designations, on the other hand, attracted investment dollars and secured the appreciation of home values. Therefore, it’s important that we always consider the wealth and poverty created by redlining. Black families were not just denied access to the upward mobility of an FHA loan; their neighborhoods were actively impoverished through federal policy. Redlining worked less like a tide rising only select boats and more like a racialized seesaw moving in a single direction.

It should come as no surprise, then, that it was the issue of inadequate housing and housing discrimination, along with the brutal enforcement of law and order by the police who patrolled these neighborhoods, that largely gave rise to Black Power organizations like the Black Panthers in the second half of the 1960s. Two of the Panther’s first four demands in their 1966 “Ten Point Program” made direct reference to land and housing. Point four reads as follows:

In fact, as historian Thomas Sugrue explains in "The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit," the urban uprisings in the late 1960s in places like Watts, Newark, and Detroit in many ways trace their origins back to the issue of housing discrimination and the production of America’s inner-city ghettoes through redlining and government policy.

The Fair Housing Act of 1968 finally outlawed redlining at the federal level. However, the unequal access to economic mobility through home ownership and outright discrimination did not go away. Take, for example, the 2008 housing market collapse. The zip codes hit hardest in the Golden State were located out on the fringes of the Bay Area — in places like San Joaquin and Contra Costa Counties — and in Los Angeles’ Inland Empire. Those locales, for too many reasons to detail here, were where a disproportionate number of black and Latino homebuyers purchased their homes in the 1990s and early aughts. Add to this the fact that blacks were roughly two-and-a-half times more likely than whites to receive sub-prime loans. And add to that that Wells Fargo, a chief purveyor of the predatory sub-prime mortgages that catalyzed the 2008 collapse, admitted, in 2012, that its brokers deliberately steered black and Latino borrowers into sub-prime loans in order to maximize lender fees, even though those customers qualified for prime loans. Together, this meant that black and Latino homeowners bore the brunt of the 2008 housing collapse and disproportionately suffered from the damage it wrought. Black homeowners were, in sum, more likely to own a home in one of the neighborhoods hardest hit by the foreclosure crisis, more likely to have a predatory sub-prime loan, and likely to have been given that predatory loan simply because of the color of their skin.

Lastly, as the issue of gentrification dominates public debates around housing, it should perhaps come as no surprise that the neighborhoods in Los Angeles County and the Bay Area most vulnerable to gentrification are often those that were redlined nearly a century ago. Starved of investment and blighted for most of the 20th century, those neighborhoods are now highly desirable as young urban professional’s appetite for the city and distaste of suburbia grows and real estate developers look for undervalued residential tracts. The racial characteristics should look familiar as gentrification often displaces low-income black and brown renters to make room for high-income white buyers.

So whether we look to the origins of mass home ownership in the country 80 years ago, or to the more recent collapse of our housing industry, or to current debates around gentrification, we see that when it comes to housing policy African-Americans, through a combination of outright racial discrimination, neglect and misfortune, have consistently seen their communities impoverished and their opportunities for upward mobility quashed. For whites, the opposite is true; owning a home has afforded millions of white families’ stable membership in America’s middle class.

When we look, therefore, at the persistent economic inequality between whites and people of color, we should be careful not to jump to foolish explanations centered around “cultural values.” Instead we should look to history. Housing does not, by any means, give us the entire answer to the racial wealth gap but it does reveal the manner in which housing policy has, over the last 80-plus years, done a highly effective job at creating wealth for some and poverty for others. Which side of that divide one falls has a lot to do with race.