The coronavirus pandemic has uncovered a troubling fact in the housing world: the federal home loan policy, which promotes "responsible and affordable access to mortgage credit" for minorities, instead prepares them for an increased risk of default.
Unfortunately, there are structural barriers for people of color in housing. Rather than being the result of accidental discrimination by lenders, it is largely due to misguided government policies. At the state and local levels, zoning and building regulations have created a supply bottleneck that is most pronounced at lower prices, where minorities tend to buy and which help raise prices.
At the federal level, policymakers and stakeholders have sought to encourage greater purchasing power for marginalized groups in order to improve access. However, lowering lending standards or interest rates will only work if there is sufficient supply.
In today's constrained market, the unintended consequence is that marginalized borrowers are bidding against each other primarily for scarce houses. The additional purchasing power is quickly converted into higher property prices, which means a stretched budget for marginalized borrowers. In economically difficult times, this leads to a higher risk of failure.
A new analysis by the AEI Housing Center shows that because of these federal guidelines, the proportion of minority borrowers living there is now the best predictor (per zip code) for a change in the crime rate due to the pandemic. The higher the minority share, the greater the increase in the crime rate. The result is a fundamental injustice that runs counter to the Fair Housing Act of 1968, which not only prohibits discrimination in housing, but also obliges federal authorities to promote the goal of fair housing.
This increased crime occurs mainly in the same neighborhoods that were destroyed a decade ago after the great recession. The only difference is that it does this despite all the alleged protections under the Dodd-Frank Act of 2010, which halted the most outrageous underwriting practices, and that the US government securitizes about three out of four mortgages.
But there is a second problem. This affordable federal housing policy, which allows minorities to buy especially during a boom when houses are more expensive, puts them at greater risk of default during a bankruptcy. It also leads to greater volatility in house prices in less affluent communities – a phenomenon that is greatly attenuated in more affluent communities with less risky loans and larger borrower resources to draw on.
While it is often argued that buying a home at a young age is key to wealth building, when and where you buy is most important. Ultimately, nothing deprives color borrowers of wealth faster than buying a home in high risk areas late in an upward housing cycle. Inadvertently, borrowers speculate on land (since the structural value of the home is largely fixed). In many areas of the country with high minority home ownership, land prices have been much more volatile than the Dow Jones Industrial Average over the past 25 years.
Wild house price cycles and risky credit discriminate against ignorant color borrowers who incorrectly determine when to buy. Stable house price cycles and secure lending, on the other hand, enable borrowers to build lasting wealth.
To achieve this, there needs to be more supply. Places like Minneapolis or Portland, Ore., Have already relaxed the burdensome local zone codes, which will ultimately allow new homes to be built.
Another location, Palisades Park, NJ, a suburb of New York City that lifted its restrictions long ago, added 24% of its housing stock between 2000 and 2013. While this process will take some time, it is estimated that the AEI Housing Center could add approximately 8 million homes over the next two decades by gradually replacing a small portion of one-unit homes with two- to four-unit homes – or about 6% of the current stock.
In the meantime, federal policies should limit rather than encourage risky lending practices, especially during a boom. Unfortunately, this message did not reach everyone. The new rule proposed by the Consumer Financial Protection Bureau's QM (Qualified Mortgage) would allow borrowers to get even riskier loans and again set up people of color for failure.
Even if the effects of COVID-19 don't lead to a full housing recession, current crime data warns us that unless federal home loan guidelines change quickly, color communities will be in the greatest pain again. This is the definition of systemically unfair living.