Suburban Residential Neighborhood, Aerial View.
Getty
You may have seen stories in April about the Fair Housing Act being signed 51 years ago on April 11, 1968. The Act outlawed housing discrimination based on race, color, religion, and national origin.
As a real estate numbers geek, I was shocked a couple of years ago when I stumbled upon some U.S. Census data that showed that the percentage of U.S. blacks who own their own homes today is essentially the same as when housing discrimination was outlawed in 1968. The 1970 census found 42% of black households owned their own homes. In 2017, the number was 41%.
I was even more shocked when I saw that from 1950 to 1970 — despite housing discrimination in the U.S. being legal for most of that time — American blacks were able to increase their homeownership rate from 35% in 1950 to 42% in 1970! That 1970 number is 20% higher than that 1950 number!
The Black Homeownership Paradox
That means, despite widespread, legal housing discrimination in the 1950s and at least part of the 1960s, the number of black households that owned their own homes increased 20% from 1950 to 1970 but, somehow, 50 years after housing discrimination was outlawed, the black homeownership rate is essentially the same today as it was the day the Fair Housing Act became law!
That seems impossible! If discrimination prevented some blacks from buying homes in the 1950s and 1960s, why didn’t outlawing that discrimination in 1968 lead to more blacks owning homes today?
What the hell happened!
U.S. Black Homeownership Rate
U.S. Black Homeownership Rate By State
Source of data: U.S. Census. Graphic from RealEstateDecoded.com.
So I researched this stunning paradox and here’s one man’s opinion of what happened.
The United States has a long history of government and private housing discrimination but let’s start with redlining before we come back to today.
Black Homeownership 1950 to 1970
It’s 1933. We’re into the fourth year of the Great Depression. Millions have lost their homes to foreclosure and millions more are headed to foreclosure. Franklin Roosevelt just became president and the government creates a new program (Home Owners Loan Corporation) to buy soon-to-be-foreclosed-on mortgages and refinance them into new government mortgages so people can keep their homes.
The banks were happy to sell their non-performing mortgages to the government because the government was paying full price as if the mortgages weren’t in default. The homeowners were happy because the government let them get one of these newfangled, ultra-modern mortgages that don’t have balloon payments in a few years.
Up until that time, when you bought a house, you would save up for many years and then pay cash for the house. If you borrowed any money to buy a house, it would be the last one-third or one-quarter or whatever of the price.
Traditional Mortgages in 1930
It seems impossible to us imagine today but back then, before the New Deal, you had to put at least 50% down to get a mortgage. You paid interest (only) on the loan every month and then in 2, 3, 4 years, when the loan was due, you paid back the entire amount you had borrowed or you paid back part of the loan and then took out a new, smaller loan for 2, 3 or 4 years.
So let’s say over many years you saved $2,000 and then you borrowed the last $1,000 and bought a house. You would pay interest on the $1,000 every month and then pay back the entire original loan amount of $1,000 when the loan became due a few years later. In today’s lingo, we would call that a short-term, interest-only, balloon mortgage. That’s a high-risk, high-foreclosure mortgage which is no doubt one reason why lenders required at least a 50% down payment.
The New Deal Mortgages
After the New Deal government program bought one of these soon-to-be-foreclosed-on mortgages from a lender, they would offer the homeowner one of these newfangled government mortgages they called “amortized.” The mortgages lasted 15 years (Wow!) and they had no balloon payments at the end (Wow!). Every month you paid the interest — plus a little principal — so at the end of the 15 years, you owned the place free and clear (Wow!).
In three years this government program bought 20% of all outstanding mortgages in the United States (by value) and refinanced the homes with these 15-year government mortgages.
This program was a success and the precursor to all future government mortgage programs, including its use of redlining. The program wouldn’t do mortgages in areas they said were economically hazardous. They had maps made of major cities with the “riskiest” areas marked in red. The red areas, it turned out, were mostly inner-city black neighborhoods. They wouldn’t do mortgages in those areas.
FHA Mortgages and Redlining
Based on that program, the next year, 1934, the government created the Federal Housing Administration (FHA) which came out with a great way to get private mortgage lenders to start making new mortgages again — mortgage default insurance. FHA would insure mortgages that met their criteria and then they would pay the private lender if a homeowner quite paying on an FHA-insured mortgage and the lender had to foreclosure. The downside risk to the bank, savings and loan or other mortgage lender was phenomenally reduced when they made mortgages that FHA insured. Oh, and FHA would insure mortgages that only had 20% down but lasted 20 years!
FHA also used redlining like the earlier program. FHA usually wouldn’t do their amazing new mortgages in redlined inner-city black neighborhoods, it didn’t matter how financially safe the buyer was.
Many private banks, and savings and loans, and later the VA, copied federal redlining lending standards when making their mortgages.
FHA Segregates The New Suburbs
A few years later to help new home builders increase the supply of homes, FHA started to insure construction loans for home builders. But now — dropping any pretense that redlining was because the neighborhoods were declining economically — FHA made the builders promise they wouldn’t sell any of the new homes to blacks.
So, blacks couldn’t buy homes out in the new suburbs at all and due to redlining, inner-city blacks couldn’t get mortgages to buy homes in their current inner-city neighborhoods either.
Urban Renewal
Next came the 1950s urban renewal projects that leveled some inner-city black neighborhoods in the name of helping inner-city black neighborhoods. Urban renewal was sold as helping poor, inner-city neighborhoods but many say they were really about politicians helping their rich, real estate developer friends.
U.S. Homeownership Levels Off
By the mid-1950s, and for the U.S. as a whole, the skyrocketing U.S. homeownership rate of the 1940s and 1950s was leveling off fast. So, in 1956, the housing industry got the government to reduce the minimum FHA down payment from 20% to 10%. It was down to 3% by the end of the decade.
It seems the attitude was, “If going from 5-year/50% down mortgages to 20-year/20% down mortgages caused homeownership to skyrocket, then, naturally, going to 30-year/3% down mortgages would be even better!” It didn’t happen. (They apparently forgot the homeownership boom was caused by a lot of different things, for example, Canada had a huge homeownership boom too, but the Canadian government never insured 20-year or 30-year mortgages.)
In the U.S., the FHA foreclosure rate had increased rapidly by the mid-1960s and it was eight times the average in the 1950s. U.S. homeownership stopped increasing.
What Happened!
Why did the black homeownership rate increase 20% from 1950 to 1970 despite widespread, legal and sometimes violent discrimination over most of that time? I don’t know for sure but I assume the top reasons were, 1) the average real U.S. wage doubled from 1950 to 1970, and 2) some blacks, if they didn’t buy in the suburbs or redlined areas, were able to get the new and improved mortgages from FHA, VA, banks or savings and loans.
This might be an important clue, too; the states with the largest percentage point increases in black homeownership from 1950 to 1970 were West Virginia, Mississippi, South Carolina and Alabama.
This post is already way too long so I’ll cover what happened after the 1968 Fair Housing Act in the next post, click here.