America’s Credit Crisis Throws Wrench Into Black Homeownership Plans

Discriminatory practices from the 1930s are still preventing Black communities from owning homes, new research from Zillow shows.

Predominantly Black neighborhoods were deemed risky through a now-illegal practice called redlining, but its impact is still being felt as Black communities struggle with credit insecurity, the Zillow report said.

Redlining is a discriminatory practice in which financial and other service providers withhold those services from neighborhoods deemed a risk. Typically, those so-called high-risk neighborhoods are minority and low-income neighborhoods.

Previous Zillow research has shown that Black homeownership improved during the pandemic. But the gap between Black and white homeownership rates has remained little changed. White homeownership was above 70 percent but their Black counterparts’ never rose above 50 percent between 1994 and 2022, Zillow pointed out.

Even if a household can afford a down payment, which can be in the tens of thousands of dollars, a lack of decent credit can exclude them from being able to secure a mortgage, Nicole Bachaud, a senior economist at Zillow told Newsweek.

Homeownership rates were at 42 percent in neighborhoods that were credit insecure, meaning its residents did not have access to credit, compared with nearly 74 percent in communities with better access to credit, Bachaud said.

Lack of easy access to credit is part of the reason behind the slow increase in Black homeownership, Bachaud emphasized. Some efforts, such as the Biden administration allowing rental and utility payments to count towards individual credit scores could help Black communities.

“What we see is higher concentrations of the share of the population that is Black in credit insecure areas,” she said, referring to a Federal Reserve Bank of New York approach that examines how “credit constrained” communities are by measuring their access to credit and the health of their credit. “That kind of points back to redlining.”

While redlining may be gone, the dearth of financial services it wrought in Black communities has stayed.

“We just replaced redlining with the formal credit economy and credit scoring and you have people who live in areas that didn’t have access to banks, and still don’t have access to banks, in the same way that a lot of majority white communities do,” Bachaud said. “So we see a lot of these outcomes kind of rooting back to the fall of redlining and the fact that not a lot on the ground actually changed beyond the policies at the higher level.”

This lack of easy access to credit is hurting the ability of Black communities to own homes.

“When it’s hard to access financing, it’s difficult to get into homeownership,” Bachaud told Newsweek. “If you don’t have good credit or you don’t have any credit, it’s very, very difficult to move forward with a home purchase.”

Homeownership key to building wealth

“The home holds the vast majority of household wealth,” Bachaud told Newsweek. “So, when we see people having more access to homeownership, we see household wealth going up and that can then be passed on as generational wealth, which helps to close that racial wealth gap that is pretty severe right now.”

In the current environment where mortgage rates are at their highest in more than two decades, it has made it even harder for Black communities to afford to buy a home.

“If you don’t have generational wealth, it’s pretty hard to get a down payment,” Bachaud said. “Majority of first-time buyers are calling on friends and family to kind of help them fundraise their down payment and if you are in an area where nobody around you owns their home and can’t tap into that equity, it’s hard.”

“We are seeing this cycle of these places where, again going back to redlining when these communities were completely cut off from homeownership for several decades, were cut off from wealth generation, cut off from equity building and access to financial services,” Bachaud said. “That kind of put a stop on the ability to have future generations down the line be able to buy homes as well.”

She added: “So we’re seeing this cycle kind of continuing to repeat itself as these places are really stuck in these cycles, with credit insecurity and the lack of home ownership.”

One thing that surprised Bachaud while studying the phenomenon of credit insecurity in Black communities was how it was cheaper in those areas to make mortgage payments than pay rent, a reversal of the current situation in the country where it may be more affordable to rent than own a mortgage.

“When we zoom into these credit insecure areas what we see is, in places where people have a hard time accessing credit and thus have a hard time accessing homeownership, those are the places where we still see mortgages being cheaper than rent,” she told Newsweek.

The Black communities would hugely benefit from homeownership but historical legacies of discrimination are still keeping them away from acquiring homes, Bachaud said.

“Redlining still has a huge impact on who is able to access housing, even in today’s market,” Bachaud said.

Policymakers needed to be more intentional in designing policies that would pull people into the formal credit economy.

“Allowing rent payments to count towards a credit score is one big way that we can pull more people into the formal credit economy, pull more people into having good credit as they’re making these payments month after month,” she said.

What was the big takeaway from her research?

“In a lot of these communities, a lot of these predominantly Black communities, there is still this huge benefit to homeownership that people are missing out on because they don’t have access to that credit,” Bachaud told Newsweek.