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The Economic Consequences of Racial Bias in the Housing Market

According to the United States Federal Housing Administration, an agency created to make affordable housing available to all, it is critical to recognize that the “most important among the adverse influential factors are the ingress of undesirable racial or nationality groups.” (sec. 235). This statement is not from the Constitution and Laws of the Knights of the Ku Klux Klan, or even the membership guidelines from an exclusive golf club in the Jim Crow South. It is part of the original United States Federal Housing Administration (FHA) Underwriting Manual, and FHA investigators had to follow the guidelines in this manual during the underwriting process for a federally subsidized mortgage loan. Biased underwriting criteria is but one example of the institutional racism that fueled the growth of segregated neighborhoods during the Great Migration, as millions of African Americans relocated from the rural South to the industrial cities of the North during the first half of the twentieth century. The repercussions of this biased system extended well beyond the real estate market because segregation created both a geographic and social barrier to rewarding career opportunities, capital access, and quality social services. Discriminatory housing practices, such as race restrictive covenants, prejudiced lending policies, and government sponsored redevelopment programs, led to segregated neighborhoods which adversely impacted African Americans’ opportunities for economic advancement.


Prior to the 1948 Supreme Court Case Shelley v Kraemer, African Americans were explicitly prohibited from living in many neighborhoods through the legal enforcement of race restrictive covenants. The mass application of race restrictive covenants, a response to the Great Migration, was motivated by the belief that racial separation was necessary to maintain property value and neighborhood stability (Gotham 623). In one such covenant, officers of the Northwest Civic Association in Detroit stated that homes in the Detroit neighborhood could not be “sold nor leased to, nor occupied by any person other than one of the Caucasian race” (Sugrue 181). Homeowners associations, such as the Northwest Civic Association, were common in the industrial cities of the North. In Detroit, for example, whites founded at least 192 neighborhood associations between 1943 and 1965 (Sugrue 212). The intended purpose of these associations was to protect the investments members had made in their homes and this goal was achieved, in part, through the enforcement of race restrictive covenants. 


Alas,  barriers around neighborhoods were not limited to race restrictive covenants. Discriminatory lending practices also played a role. Following the lead of federal lenders, such as the FHA, underwriting policies of private financial institutions routinely included physical racial boundaries as a measure of credit risk. The United States Commission on Civil Rights reported that homes in racially integrated neighborhoods were considered to be bad investments relative to homes in homogeneous neighborhoods (3). Because homeownership often depends on financing, these lending practices spurred the growth of racially segregated neighborhoods. In one infamous example of the link between financing and segregation, the FHA withheld funding until a real estate developer in Detroit agreed to construct a foot-thick, six-foot-high cement wall along the property line separating the development’s black and white neighborhoods (Sugrue 65).

Discriminatory lending practices not only restricted housing options for African Americans, they often contributed to the impoverishment of the few available neighborhoods through the practice of redlining. The name redlining, which was introduced by the FHA, comes from the red shading on a map indicating that an area was deemed unfit for lending. This practice, which was legal until Congress passed the Fair Housing Act of 1968, meant that mortgage applications were denied on the basis of the racial and ethnic composition of the neighborhood. As a result, less that two percent of all homes built with FHA support from the end of World War II to 1960 were occupied by African Americans (Wiese 101). Private lenders joined the FHA in the practice of redlining, which left black residents trapped in segregated neighborhoods that were cut off from legitimate investment. These neighborhoods, without access to legal and reasonable investment options, were doomed, by self-fulfilling prophecy, to a state of underdevelopment and disrepair (United States Commission on Civil Rights 4).


In addition, real estate brokers worked in conjunction with the mortgage lenders under the shared belief that it was financially prudent to maintain segregated neighborhoods. As late as 1950, the National Association of Real Estate Brokers code of ethics included written statements that warned agents not to introduce members of any race whose presence will be detrimental to property values in the neighborhood (United States Commission on Civil Rights 3). Because integrated neighborhoods were associated with falling home prices, real estate agents actively worked to maintain the homogeneous composition of existing neighborhoods. The power of the real estate agent to create and maintain segregated neighborhoods was significant because most Americans, regardless of race, relied heavily on the advice of real estate brokers when purchasing a home (Courant 331).  Real estate agents were yet another brick in the institutional wall that hemmed African Americans into segregated neighborhoods.

The institutional racism that denied African Americans access to a fair and open housing market also hindered economic mobility. When black people were forced into segregated, and often poor, neighborhoods, they were cut off from outside opportunity. Unfortunately, many urban redevelopment projects, which were meant to address the problems of underserved, predominantly minority neighborhoods, often caused more problems than they solved (Cutler, Glaeser, and Vigdor 460-66). For example, public housing projects are often located in segregated areas separated by highways, rivers, railroad tracks, and other physical barriers, from the urban hub of commercial and recreational activity (Pendall, Puentes, and Martin 6). Furthermore, the National Commission on Fair Housing and Equal Opportunity found that redevelopment projects often replaced taxable properties with public housing which unsustainably shifted the financial burden for maintaining social services onto fewer residents (7). This toxic combination of isolation and failing social services effectively drains the lifeblood from the neighborhood.

The isolation and lack of economic vibrancy in poor, segregated neighborhoods means that most jobs are located outside the community. The physical separation between home and work imposes significant barriers. Residents from segregated neighborhoods face higher, in some cases prohibitively higher, commuting costs, when accounting for both time and money (Kain 193). Worse still, the physical and social barriers mean less information and therefore less opportunity for networking and career advancement (Kain 179). Segregation limits career opportunity and economic mobility for African Americans forced to live in segregated areas.

Even African Americans who manage to work their way into the higher income brackets are handicapped by a restricted choice of neighborhood. Numerous studies show that African Americans with upper-middle-class incomes tend to reside in lower-middle-class neighborhoods and thus are not afforded the benefits available to their white economic equals (Sharkey 927). The Ohio State University Kirwan Institute for the Study of Race and Ethnicity found that these neighborhood benefits include critical economic building blocks, such as access to high quality schools and healthcare and the opportunity to build home equity in a safe and economically stable neighborhood (2). 

Restrictive housing policies adversely impact wealth as well as income. Although these two financial measures are related there are important differences between income and wealth with one distinction being that the racial disparity in the latter is greater than the former (White 1). Restricting homeownership for African Americans means restricting the opportunity to build home equity, which is one of the most common means of acquiring wealth. Unfortunately, growth of home equity is not possible without the very same conditions that discriminatory housing policy negatively impacts:  affordable financing, economically steady neighborhoods, and opportunity for a stable career path.  The acquired wealth that results from growth in home equity is crucial for economic advancement because it can be used for education, business opportunities, financial emergencies, and funding retirement. Accumulated wealth can also be passed along to the next generation. Limiting the opportunity for wealth accumulation means limiting the opportunity for upward intergenerational economic mobility, an abominable consequence that runs counter to core American values.

Housing policies shape lives. The purchase of a home is a significant financial investment with lasting economic and social consequences.  During the Great Migration, many African Americans faced institutionalized discrimination in the real estate market and this limited their ability to freely choose a home that best fit their needs. Real estate brokers, who in theory were obligated to provide clients with expert guidance, directed African Americans into the subset of available housing located in segregated neighborhoods. Housing developers and mortgage lenders sought to protect their financial interests by locking blacks out of established and economically stable white communities. African Americans were segregated into neighborhoods that were both physically and socially separated from access to key economic building blocks such as high quality education and healthcare, career advancement opportunities, stable home values, and reasonable financing options.  Institutionalized racism in the housing market did more than limit housing options for African Americans; it limited economic opportunity, which is an inexcusable travesty of justice with enduring ramifications.  


Works Cited

Courant, Paul N. “Racial Prejudice in a Search Model of the Urban Housing Market.” Journal of Urban Economics 5 (1978): 329-345.  Print.

Cutler David M, Glaeser Edward L, Vigdor Jacob L. “The Rise and Decline of the American Ghetto.” Journal of Political Economy 107 (1999): 455–506.  Print.

Gotham, Kevin Fox. “Urban Space, Restrictive Covenants and the Origins of Racial Residential Segregation in a US City, 1900–50.” International Journal of Urban and Regional Research 24.3  (2000): 616–633. Print.

Kain, John F. “Housing Segregation, Employment, and Metropolitan Decentralization.” Quarterly Journal of Economics 82.2 (1968): 175–197. Print.

National Commission on Fair Housing and Equal Opportunity. The Future of Fair Housing. The Leadership Conference on Civil and Human Rights, 2006. Print.

Pendall, Rolf, Robert Puentes, and Jonathan Martin. “From Traditional to Reformed: A Review of the Land Use Regulations in the Nation’s 50 largest Metropolitan Areas.“ The Brookings Institute Research Brief. 14 Aug. 2006. Print.

Sharkey, Patrick. 2014. "Spatial Segmentation and the Black Middle Class." American Journal of Sociology 119.4 (2-14): 903-954. Print.

Sugrue, Thomas J. The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit. Princeton: Princeton University Press, 1996. Print.

The Ohio State University Kirwan Institute for the Study of Race and Ethnicity. The Geography of Opportunity: Review of Opportunity Mapping Research Initiatives. Columbus: The Ohio State University, 2008. Print.

United States Commission on Civil Rights. Understanding Fair Housing. Clearinghouse Publication 42 1973. Print.
United States. Federal Housing Authority. Underwriting Manual, Underwriting and Valuation Procedure Under Title II of the National Housing Act. 1938. Print.

White, Gillian B. “In D.C., White Families Are on Average 81 Times Richer Than Black Ones.” The Atlantic November 2016: 1-8. Print.

Wiese, Andrew. Places of Their Own: African American Suburbanization in the Twentieth Century. Chicago: University of Chicago Press, 2004. Print.






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