Inclusive Lending

The Lasting Effects of Redlining: Understanding Its Impact on Today's Homeownership

April 30, 2024

One of the most effective ways to build wealth in America is through owning a home. Homeownership allows you to build equity and pass on generational wealth to your children. It can act as an investment or a rental to generate more income. This means that when there are barriers to homeownership, those barriers aren't just to owning a home, but also to accumulating wealth as individuals and as a community.

The Wealth Gap

According to the Federal Reserve Bank of St. Louis, as of the third quarter of 2023, the current racial wealth gap is as follows:

Black families owned about 24 cents for every $1 of white family wealth, on average
Hispanic families owned about 19 cents for every $1 of white family wealth, on average

Wealth is a measure of assets and property. This means that the racial wealth gap and the racial homeownership gap are intrinsically linked. According to the National Association of Realtors, the rate of white homeownership is around 72%, while the rates of Black and Hispanic homeownership are around 44% and 51% respectively.

Redlining and Racial Discrimination

This homeownership gap is not incidental. It is the direct result of governmental policies that intentionally segregate diverse communities and limit their lending opportunities. One of the most impactful of these was a practice known as redlining.

Redlining is a discriminatory practice that emerged in the early 20th century and has had a significant and lasting impact on the socioeconomics of the U.S. It started in the 1930s when the federal government, through the Home Owners' Loan Corporation (HOLC), created color-coded maps to assess the risk of lending in various neighborhoods across the states.

The areas designated as "high-risk" were predominantly diverse communities, particularly Black and immigrant neighborhoods. These neighborhoods were marked in red, hence the term "redlining."

The Federal Housing Administration (FHA) adopted redlining at the start of its operations. Since the FHA was created to help regulate the mortgage industry after the Great Depression, its decision to practice redlining solidified structural segregation in housing. Denied access to affordable mortgages and loans, diverse communities were effectively locked out of the housing market, perpetuating racial segregation. This segregation led to unequal access to quality education, healthcare, and employment opportunities, further entrenching economic disparities.

Lasting Effects on Economic Status

aerial view of neighborhood

Redlining also resulted in the devaluation of properties in diverse neighborhoods. The lack of investment and disinvestment by financial institutions led to a decline in property values. This meant that even if diverse communities overcame the barriers to homeownership, they wouldn't experience the same increase in the value of their properties as white property owners. This devaluation persists, as homes in previously redlined areas continue to be worth less than comparable properties in predominantly white neighborhoods.

By the time The Fair Housing Act made the practice of redlining illegal in 1968 (only 56 years ago), diverse communities had been excluded from major home loans like FHA and VA loans for over 30 years. At that time, markets that would have been accessible to diverse communities were no longer affordable areas to buy in. As white homeowners were building equity and wealth from buying and selling, diverse communities were fighting for access to those areas.

During the same time frame, the FHA subsidized "white-only" subdivisions and helped white people move into them. This further segregated housing while simultaneously funding white homeownership and excluding and neglecting diverse communities. We can still see segregation throughout the U.S. as a result.

Opening the Market

The Fair Housing Act of 1968 made redlining and other discriminatory lending practices in the mortgage industry illegal. The Community Reinvestment Acts were also created in the 1970s, and there have been multiple amendments aimed at encouraging financial institutions to invest in underrepresented communities.

The FHA has also changed, and continues to change, its policies around lending to address the consequences of its discriminatory practices. In the last three years, approximately a quarter of a million Black homeowners were able to buy homes using FHA loans.

However, 56 years is not a long time, and there is still a lot of work that needs to be done to bring about economic equity. This includes strengthening fair lending laws, investing in community development, and working within the industry to provide opportunities to diverse communities of borrowers.