From The Atlantic:
“Becoming a homeowner was not a fruitful asset accumulation strategy for low- and moderate-income black families in the 2000 decade, in either the short- or medium-term,” write Sandra J. Newman and C. Scott Holupka, authors of a new study from Johns Hopkins University.
…Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn’t have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 by 2011. All told, the black families lost, on average, 43 percent of their wealth.
…in general black families would have been better off if they hadn’t bought homes at all.
And yet, the advocates of mortgage subsidies and other misguided government housing policies are as active as ever lobbying for more.
Why did the sample of comparable white home owners not do as poorly?
Presumably, the value of their homes declined less. One possibility is that “affordable housing goals” for lenders temporarily increased the prices of homes in black neighborhoods and also created pockets of foreclosures concentrated in those neighborhoods. There are other possibilities, of course.
The value of houses in the city of Detroit completely cratered (Detroit has been in bad shape for a long time, of course, but widespread sub $20,000 prices on habitable houses are mostly a post-recession phenomenon) — how many other majority black inner-city areas experienced a similar dynamic?
Would it be too “racist” to suggest that we may be observing very different and diverse markets; one being much “thinner” (in participants and their aggregate incomes – aggregate volume of purchasing power) [11-14% of the population Black] than the other?
The idea of markets in which somebody, at some price, will buy (or take up a debt) is affected by the number of “somebodies” who frequent the market and the *aggregate* volume of purchasing power available to them.
Are the markets segregated? Did non-black buyers come into the markets for black “owned” (and indebted) properties? Apparently not.
Entry level homes had the largest swing in values and being less affluent many more blacks would fall in this segment.
“Entry level homes had the largest swing…”
Gee, I wonder why that might be.
I believe Robert Shiller found that, keeping house quality constant, long-run house price returns is zero. As a wealth accumulation strategy, it is terrible. But for for some areas and some periods, there are huge gains while elsewhere, huge losses.
I remember watching Barney Frank, when he was Chair of the House Financial Services Committee, berate the bankers because they weren’t writing enough mortgages for minorities. The term racist wasn’t used quite as freely then as today, but that was clearly the thought. So the bankers, rightly afraid of Barney, went home and wrote the mortgages and then, when it all crashed, that became “predatory lending.”
The spread between credit snobbery versus predatory lending is razor thin, often moves intraday, and sometimes vanishes altogether.
The government prodded blacks* to take out mortgages and pressured lenders, GSE’s, and alphabet agencies to provide those loans to blacks preferentially. This provided blacks with funds to invest in housing assets. However, the government did not offer any long-term guarantee that blacks would enjoy gains (either in nominal price, or worse, after operating costs) on those mortgage-financed leveraged investments. Though the injection of easy mortgage money (NINJA loans) pushed up home prices for a while, black buyers were just as exposed as white buyers to market fluctuations in the longer run.
So the one-standard-deviation-lower mean IQ of America’s blacks worked its magic: blacks on average invested mortgage proceeds along with their own down payments (if any) less wisely than whites, because blacks are less intelligent than whites (on average). Blacks bought disproportionately more houses and condos in declining neighborhoods and maintained their assets less efficiently.
No one has done (or perhaps it is just that no one has published) the killer study which we would all like to read: a study investigating the impact of borrower IQ (measured directly or by a really strong proxy like SAT score or even educational attainment adjusted for school quality) on borrowing, investment outcomes, and defaults.
Hypotheses which cry out for investigation:
* Borrowers with lower IQ’s will have lower incomes, even controlling for race, age, sex, etc.
* Borrowers with lower IQ’s will have lower credit scores, even controlling for income, race, age, sex, etc.
* Borrowers with lower IQ’s will pay higher interest rates, even controlling for credit score, income, race, age, sex, etc. (Hypothetically, loan salesmen will take more advantage of low-IQ borrowers even when they are reliable payers, so they have good credit scores.)
* Borrowers with lower IQ’s will make smaller gains on mortgage-enabled investments in housing assets, even controlling for interest rate, credit score, income, race, age, sex, etc.
* Borrowers with lower IQ’s will default on loans more often, even controlling for asset-price changes, interest rate, credit score, income, race, age, sex, etc.
Some of these hypotheses might be invalidated, or shown to be only partly true (for example, low-IQ borrowers could make fewer gains solely because they pay higher interest rates, not because they target undesirable assets for investment).
If Raj Chetty can get hundreds of thousands of tax returns to collate with other data, why doesn’t he get hundreds of thousands of educational records to do likewise?
*Also other favored minorities, i.e., not whites and asians.
Zoned zone versus flatland. African Americans wildly disproportionately live in the Zoned Zone, where the biggest price surges and collapses occurred.
White Americans live proportionately far more in Flatland, which had much lower prices surges and collapses, or not very much at all. This study is just telling us where African Americans live.
It is also a case of a more vulnerable minority suffering from restrictive regulation (in this case land use).
The Zoned Zone v Flatland usage is from Krugman
http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html?_r=0
So why did prices boom and bust on this zoned zone?
Because if you restrict supply it drives up prices, increasing the level of investment attracted by the rising prices which are then much more susceptible to collapse if prices stop rising.
Restricted supply asset markets tend to be more volatile (e.g. gold) because of the higher “speculative” element.
Ethnic groups self-segregate. When whites flock to a geographic region, such regions tend to prosper, and home buyers profit. When blacks flock to a geographic region, such regions tend to plummet, and home buyers suffer. It’s quite a simple and direct explanation.
I doubt it is that simple (or that racist- and btw I hate you a little for making me do that!). Blacks have lived in the cities for decades. Isn’t it more likely (as long as we are just spit-balling aren’t going to actually go look) that whites started to (re)gentrify population centers with natural or artificially constricted supply causing a credit feedback loop. Blacks aren’t big enough to crash the entire economy, at least not without the help of a credit boom.
If a lot of Chinese people move to a neighborhood, the area sees lots of new Chinese restaurants. That’s not random correlation, that is cause and effect. If a lot of low crime, well behaved, socially functional, educated, entrepreneurial whites suddenly move to Brooklyn, it’s not just some random correlation to see that area gentrify.
Granted. I just don’t think the housing bubble was caused by a lot of blacks moving in.
You may have to consider the decline in family formation ratios between black and non-black.
“Demand” for “first time” has some correlation to the formation ratios.
Did no one else notice this?
Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn’t have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 . . .
Either this is a typo, or the study compared Black families that bought in 2005 to White families that bought in 2007- which would be indefensible.
It appears to be a 3rd option- really terrible writing.
There may be an “excuse:”
The “peak” prices paid by first time black buyers may have occurred in 2005. The equivalent paid by non-black may have occurred in 2007.
Still, that should have been noted, if controlling.
Correlation is not causation. The relevant factor is not a racial comparison of a correlation between home ownership and net worth. More relevant would be a comparison of the growing or shrinking net worth of home-owners and non-home-owners in the same demographic. In other words, what happened to the net worth of non-home-owning African Americans during the same period? Also, any statistic for a long-term asset like home ownership that begins and ends within in a short period with the financial crisis in the middle is bound to be skewed.
The S&P 500 peaked in January 1973 and did not surpass that level until 1980.
At any time in that period you could compare the value of the S&P 500 to its early 1973 value and conclude that stocks were a poor investment.
You have selected one period when a sub-sector of home buyers lost money and claimed this supported your position that home-ownership is a bad investment.
Consequently all the government program to support home ownership were a waste of resources.
Seems like an extremely biased data selection that would not stand up to much examination.