Breaking the Homeownership Catch-22 for Communities of Color

Throughout the last century, federal policymakers made a choice: Homeownership is one of the primary ways for families to build wealth. From federal tax incentives for owning a home to expanding access to low-cost mortgage loans issued by the federal agencies, homeownership has long been promoted as a wealth-building instrument, one that allows families who can access it a way to establish economic security in a country that otherwise tends to not provide it. But policymakers made another choice, too: The mortgage financing needed for most families to own a home would only be available to some — namely white families.

The state-sanctioned use of redlining (where predominantly Black neighborhoods were deemed too risky for investment), racial covenants (where buyers of color were restricted from purchasing homes in certain neighborhoods), and the long history of racial exclusion enshrined through policy ensured that home financing was channeled away from Black, Hispanic, and other communities of color. These practices have since been outlawed, but what remains today is a financing system that was not built for and does not adequately serve the families it traditionally excluded: primarily, low- and moderate-income (LMI) communities of color.

This is in large part because the legacy of these policies and practices has been compounded over decades, resulting in the homeownership catch-22 we face today: Owning a home builds wealth, but some form of wealth is needed to own a home. The impact of this is stark — the homeownership gap between Black and white households reached its highest level in 50 years — even higher than it was when discrimination against Black homebuyers was legal.

Recognizing this reality, an array of affordable homeownership programs and lending products have emerged to fill the gaps created by the traditional banking system. To better understand these options, the Chicago Community Trust commissioned New America’s Future of Land and Housing (FLH) program to explore financing options for LMI buyers in communities of color on the private market. In a recent report, FLH leveraged insights from a high-level snapshot of financing products, as well as interviews with leaders of affordable homeownership programs in Chicago and across the United States, to shed light on three key areas:

1. The structure of lending products and other mechanisms used to increase home affordability for LMI borrowers in communities of color;
2. The funding sources that allow programs to secure capital and subsidize homeownership, and how risk is mitigated; and
3. The ability of programs to leverage private investment to scale affordable homeownership.

“Owning a home builds wealth, but some form of wealth is needed to own a home.”

What is clear from our findings is that affordable homeownership programs have their work cut out for them. These programs need to unlock financing that bridges the gap between what an LMI buyer can pay and the price of a home. And they must do so while ensuring that financing is safe and sustainable — unlike the risky, non-traditional, and unregulated subprime loans that were so common in the run up to the 2008 financial crisis. That’s why most programs are built around increasing access to what’s widely considered the “gold standard” for safe mortgage lending: the thirty-year, fixed-rate mortgage.

These long-term, predictable loans, when combined with low down-payment requirements, fair terms, and financial assistance, bring down the cost of homeownership so that it's within reach of families without significant wealth. However, maintaining affordability in ways that do not pass on higher costs to the buyer, while also ensuring that lenders and secondary investors feel secure assuming risk is no small feat.

The good news is that programs that bridge the gap between what a lower-income buyer can afford to pay and the price of home on the private market exist, and are increasing access to wealth-building opportunities in communities across the country.

The more challenging news is that addressing the racial homeownership gap at the local, state, and national level in a meaningful way will require coordinated public and private effort that focuses on systemic changes, not just increasing access on the margins. These systemic changes include grappling with how credit markets perceive risk, unlocking financing for entities providing credit, and exploring permanent affordability that exists outside of the speculative housing market.

As we work towards these systemic changes, we must also continue to use the tools at our disposal to find innovative ways to bring homeownership within reach. After all, the opportunity cost of lost wealth is too high: More than just a difference in assets, wealth buys better health, education, and financial security, and allows families to plan for the future they want, not just live with the one they can afford.

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