California’s Housing Divide – Public Policy Institute of California
California’s housing crisis affects residents of all races and ethnicities, but the lack of affordable housing is particularly acute for African Americans and Latinos. Skyrocketing rents in many California metropolitan areas are imposing increasing financial burdens, limiting savings opportunities. Combined with rising house prices and interest rates, owning a home has become harder to afford over the past year, although many have seen their wages rise. Given the disproportionate impact of the COVID-19 pandemic on households of color, disparities in homeownership are expected to widen. To close these gaps, policy actions targeting the causes of these long-standing inequalities are needed.
Before the pandemic, the racial homeownership gap in California was large, but it seemed to be narrowing. In 2019, the homeownership rate for Latinos was 44.1%, 19.2 points lower than that for white households. The black homeownership rate was even more concerning at 36.8%, 26.4 points lower than the rate for white households. However, Latino and Black households also saw large homeownership gains between 2014 and 2019 (2.2 and 2.3 percentage points, respectively). Meanwhile, homeownership among Asians increased the most over this period (2.5 percentage points) and, at 59.8%, was only 3.4 points lower. than the homeownership rate for white people in 2019. Home equity is the majority of the wealth of low- and middle-income familiesdifferences in home ownership rates amplify wealth inequalities.
Most landlords start out as renters and then save up to buy a home, but when rents are high the chances of saving are low. African-American and Latino renters are more likely to pay a significant portion — 30% or more — of their household income on gross rent, making the prospect of saving for homeownership daunting. (Even among homeowners, African Americans and Latinos are more likely to spend a high share of their income on mortgages.)
To a large extent, the racial homeownership gap reflects persistent income inequalities: the median income of white households in California is 45% higher than that of Latin American households and 65% higher than that of African-American households. But other factors, such as less and less intergenerational wealth, lower (or non-existent) credit scores and lack of information about the home buying process, also make it harder to buy. of a home for black and Latino adults. Besides, the historical legacy of racially discriminatory practices—as well as the current racial disparities in credit metrics that determine loan outcomes— are a key factor in the homeownership gap.
Like housing prices continue to rise rapidly in the aftermath of the pandemic, there are fears that these inequalities will worsen, leaving many Californians, especially younger, low-income and non-white people, without the meaningful opportunity to own a home. However, pre-pandemic trends show that closing the racial homeownership gap is possible. Given the rising prices and uneven economic impacts of the pandemic, policymakers should consider stepping up efforts to ensure that this progress continues.
In the short term, policy makers should target structural barriers in housing markets– for example, by increasing support for low-value mortgage programs and overhauling credit-scoring practices – which create unique disadvantages for aspiring Black and Latino owners. Recently, Fannie Mae decided to allow lenders to consider applicants’ lease payments in assessing credit riska decision that may provide an additional advantage to borrowers of color with no or limited credit history.
In the longer term, addressing the underlying causes of income inequality, such as disparities in educational attainment and access to better jobs, can increase the chances of homeownership and provide a pathway to wealth creation. Moreover, after decades of underconstruction, continued efforts to increase the supply of affordable housing will also be necessary if owning a home is to be an achievable goal for middle-class families.