The recent killings of Ahmaud Arbery, Breonna Taylor, George Floyd, Tony McDade, and Rayshard Brooks have ignited outrage across the United States and the world. We at Divvy share this outrage. We are looking more closely, not only at issues of police brutality, but at problems in our own industry. It is clear that the U.S. government, local governments, private companies, and individuals have all participated in racist policies that systematically deprived Black Americans of their rights and robbed them of countless opportunities for financial advancement. 

Homeownership is a key driver of wealth, especially for minorities, as Harvard’s Joint Center for Housing Studies has shown. The impact of housing discrimination is larger than just lower rates of homeownership: it excluded Black Americans from building wealth and sharing in the widespread economic prosperity of the 20th century. 

Our mission at Divvy is to make homeownership accessible to everyone, but in order to do so, we must understand the historical practices that have led to mass housing injustice. At Divvy, we are committed to taking a hard look at the housing industry to understand the role systemic racism has played, the state of the industry today, and how we can be part of the solution.

That is why we are publishing a series of three blog posts titled “Understanding and Dismantling Systemic Racism in Housing.” In this series, we’ll look at the structures of oppression that must be defeated and removed and the structures of opportunity that must be created in order to make the housing industry equitable. 

We hope you’ll join us on this journey.

Part 1: The Roots of Racism in Housing

In the first part of our series, we will examine this history from the era of Reconstruction up to the present. These are the structures of oppression we want to focus on so we can understand and defeat them. To better grapple with the many problems throughout this period, we’ve broken up the article into four sections, as follows: 

• 1865-1900s: Broken Promises of Financial Prosperity for Freed Black People: In the post-war period, promises made to freed Black people by the U.S. government were quickly broken and racist policies prevailed.

• 1900s-1940s: How Racist Fear Defined 20th Century Housing Policy: A racist lie was used as the justification for redlining, a policy of excluding Black Americans from accessing homeownership that prevented them from participating in the 20th century’s extraordinary economic gains.

• 1940s-1970s: The Housing Industry’s Embrace and Exploitation of Racist Policy: Two racist practices, blockbusting and contract-buying illustrate how actors in the housing industry used white fear and Black determination for homeownership to deliberately design ways to profit at the further expense of Black wealth.

• A Generational Tragedy: The Long-Term Impact of Systemic Racism on Black Wealth: The decades of neighborhood segregation and Black financial disadvantage that these racist policies caused have been a driving force in creating the racial wealth gap that persists today.

1865-1900s: The Broken Promises of Financial Prosperity for Freed Black People

In the post-war period, promises made by the U.S. government to freed Black people were quickly broken and racist policies prevailed.

On June 19th, we celebrated “Juneteenth” which marks the day in 1865 that Union soldiers arrived at Galveston, Texas, and told the people there that the Civil War had ended and that the enslaved were finally free. Sadly, this occurred two and a half years after the Emancipation Proclamation. It was later that year, December 6, 1865, when the 13th Amendment to the U.S. Constitution was ratified. 

While the 13th Amendment may have ended the use of law to enslave Black Americans, it unfortunately marked the beginning of countless efforts by the federal and local governments to  exclude them from sharing in the financial progress of the country.

When the Civil War ended in 1865, the Reconstruction Era began. This difficult period began with lofty ideas of re-uniting the country and solidifying the legal status of Black people. Congress established the Freedmen’s Bureau to promote land ownership and financial stability for the formerly enslaved. The Bureau’s mandate included distributing 40-acre plots of land to Black families throughout Florida, Georgia, and South Carolina, as well as establishing the Freedman’s Savings Bank to give Black people access to banking.

However, these efforts quickly began to unravel in the face of persistent racism. Andrew Johnson became president in April of 1865 following Abraham Lincoln’s assassination and moved quickly to reverse the 40-acre mandate just months after it was made. The Freedman’s Savings Bank survived another 9 years until 1874, but ultimately collapsed when a wave of speculative loans made by its exclusively white trustees defaulted and left the bank insolvent. The bank’s Black depositors paid the price, losing the savings they had accumulated since being freed.

Failure to provide former slaves access to economic opportunity was finalized with the Compromise of 1877, which ended the Reconstruction Era and marked the beginning of Jim Crow. The last Union Troops who had been stationed in the south to keep peace and protect the new rights of Black Americans were removed, ending the protections that had guarded the modest progress that had been made. 

The federal government’s decision to remove Union troops gave the southern states freedom to design an economic system that revived many of the disenfranchising elements of slavery. What emerged was a system known as sharecropping, in which landowners would offer Black workers the use of their land for farming in exchange for a share of the eventual crop. The owners would then provide the Black tenant with supplies such as seeds and farm equipment. These supplies would be loaned to the tenant on debt terms, and the tenant could not leave the landowner’s property until the debt was repaid. Often, especially during weak harvests, this debt would become extraordinarily difficult to pay back, thus trapping the Black tenant on the owner’s property. Richard Rothstein describes in The Color of Law how “plantation owners redefined their former slaves as sharecroppers to maintain harsh and exploitative conditions.”

Black people could now legally leave the south in response to its racist policies, but they could not escape these policies’ consequences. A cycle of racism in which Blacks were both the victims of violent acts and also blamed for those same acts made it much harder for them to pursue homeownership. In the vast majority of cities across the country that had yet to be introduced to Black residents, Black people were branded as dangerous. Entering the 20th century, this faulty perception would be the primary justification for consistent racism in creation of housing policy. (Source: The Color of Law)

1900s-1940s: How Racist Fear Defined 20th Century Housing Policy

A racist lie was used as the justification for redlining: the policy of excluding Black Americans from accessing homeownership that prevented them from participating in the 20th century’s extraordinary economic gains.

The homeownership system in the United States today is largely a result of federal housing policies that were planned in the 1920s and implemented during the 1930s.  As U.S. political leaders anxiously watched the rise of communism in Russia following World War I, they sought out ways to diminish any such occurrence in America. At this time, policies were created to broaden access to homeownership.

Many policymakers hoped that widely distributed property ownership would inoculate the country against the appeal of other economic systems, such as communism. Initially, the federal government’s goal was to sell an American dream in which owning a home was widely accessible to the public. Americans bought into this vision during the roaring ‘20s, but the dream was nearly crushed when the Great Depression forced masses of homeowners to the brink of foreclosure. (Source: The Color of Law)

To rescue this surge of owners on the brink of losing their homes, the Roosevelt administration created the Home Owners’ Loan Corporation (HOLC). HOLC was a savior for many owners. It purchased delinquent mortgages and restructured them with low interest rates and long-term amortized payments. 

Right as the housing policies that would define homeownership for decades were being planned, the national misperception that Black people’s presence in communities led to violence became increasingly persistent. It ultimately became the justification for excluding Black Americans from using homeownership to participate in the 20th century’s extraordinary economic gains.

The benefits of HOLC were reserved for whites only. On the premise of assessing the risk levels of the mortgages it was buying, HOLC made color-coded maps of neighborhoods in all major cities across the country that outlined the “safest” neighborhoods in green and “riskiest” in red. Any neighborhood in which African Americans lived, regardless of safety or economic prosperity, received a red outline. This was the beginning of “redlining.” (Source: The Color of Law)

An example of a HOLC map used for redlining. Image Source: The University of Richmond’s Mapping Inequality project.

Redlining prevented Black homeowners from avoiding foreclosure during the Great Depression, and ultimately served as the precedent to bar them from accessing ownership for another three decades. 

The Federal Housing Administration (FHA) was created in 1934 to catalyze middle-class homeownership by insuring mortgages so that banks would increase the volume of loans they issued. The FHA adopted HOLC’s racist risk assessment practices, and, as described in The Color of Law, “racial segregation now became an official requirement of the federal mortgage insurance program.” It was a massive success for white families, but excluded everyone else. 

HOLC and the FHA were clear in explicitly attributing their risk management policies to fear of racial integration. The first edition of the FHA’s Underwriting Manual published in 1935 asserted that, “if a neighborhood is to retain stability it is necessary that properties shall continue to be occupied by the same social and racial classes.” Their reasoning was that “a change in social or racial occupancy generally leads to instability and a reduction in values.” (Source: The Color of Law)

It was true that violent reactions of white people against Black people who arrived in white communities had frequently led to instability, both in the south and beyond. But, by using this fact to justify creating policies of segregation instead of violence prevention, the federal government embraced racist sentiment and proliferated it nationally through housing policy. 

1940s-1970s: The Housing Industry’s Embrace and Exploitation of Racist Policy

Two racist practices, blockbusting and contract-buying, illustrate how actors in the housing industry used white fear and Black determination for homeownership to deliberately design ways to profit at the further expense of Black wealth.

Following the government’s development of redlining, the housing industry leveraged the fear it promoted to further exploit Black people seeking homeownership. Two of the most common practices became known as blockbusting and contract-buying. 

Blockbusting was a scheme executed by white speculators to purchase properties from white owners at discounts by playing upon their fear that property values would decline if any Black person moved into their neighborhood. It became known as blockbusting because speculators would hire Black people to spend time on specific blocks of white neighborhoods, then circulate information to the white owners warning that Black buyers were planning to purchase on the block. All a speculator needed was one owner on the block to be panicked into selling to them at a discount.

The speculators would then resell the first home they purchased on a block to a Black buyer at an inflated price. Once this Black person moved in, speculators would use that sale as evidence to receive discounted deals from more white owners on the block. This cycle quickly shifted ownership of neighborhoods from white to Black at inflated prices. Once a neighborhood had been fully blockbusted, home values would crater since there were no more panicked sellers to exploit for discounts. The FHA then used these widespread instances of declining values as further evidence that its racist risk assessments were accurate. (Source: The Color of Law)

A story in the Saturday Evening Post, July 14-21 issue, 1962. Image Source: the Newberry Digital Collection titled “Civil War to Civil Rights.”

As their lack of access to homeownership increased, Black buyers became more desperate to find alternative ways to own. Contract-buying was developed to exploit this desperation. Black home buyers were sold contracts that allowed them to live in the home but not to hold ownership of the home. They were promised ownership after the contract was paid in full, but most often, loopholes were used to take the home from them before the end of the contract.

In The Case for Reparations, Ta-Nehisi Coates tells the stories of Black owners in Chicago who fell prey to this practice. He describes how contract peddlers “would sell homes at inflated prices and then evict families who could not pay—taking their down payment and their monthly installments as profit. Then they’d bring in another black family, rinse, and repeat.” Black home buyers understood that these were high risk purchases, but gravitated towards them because they were determined to own homes of their own and had limited options to achieve that goal. It is estimated that in one city (Chicago) alone, Black families lost $3-4 billion in wealth because of this practice. 

The stories of blockbusting and contract-buying illustrate how actors in the housing industry used white fear and Black determination for homeownership to deliberately design ways to profit at the further expense of Black wealth.

A Generational Tragedy: The Long-Term Impact of Systemic Racism on Black Wealth 

The decades of neighborhood segregation and Black financial disadvantage caused by racist policies have been a driving force in creating the racial wealth gap that persists today. 

While some of the policies described above were eventually outlawed, the consequences of those policies live on. Redlining, blockbusting, and contract-buying were officially banned in 1968 as part of the Fair Housing Act. The Fair Housing Act was intended to strengthen the landmark Civil Rights Bill of 1964 with specific protections against discrimination in housing. It prohibited discrimination based on race, religion, national origin or sex when selling homes, renting homes, or financing homes. While the act faced significant pushback in Congress, it was ultimately passed under public pressure following the assassination of Martin Luther King, Jr. 

These concrete steps towards reducing housing discrimination were welcome. However, they could not undo the decades of neighborhood segregation and Black financial disadvantage that redlining, blockbusting, and contract-buying had caused. Their deep effects have persisted for generations and been the driving force of the racial wealth gap that persists in the United States today. 

Federal Reserve data shows the total household wealth of white Americans to be 20x higher than that of Black Americans as of July 2019. On a per-capita basis, this translates to approximately $366,000 in wealth per average white person vs. $105,000 in wealth per average Black person. The Brookings Institute has estimated that the net worth of a typical white family is nearly ten times greater than that of a Black family.

Image Source: Federal Reserve Distributional Financial Accounts

While there are numerous factors that have influenced the distribution of wealth amongst races, the enormous opportunity cost to the generations of Black people who were barred from the federal mortgage program and homeownership in neighborhoods with higher property values has had a substantial impact.

Redfin recently published an article comparing appreciation of homes in formerly redlined neighborhoods vs. those that were greenlined. According to this data, the average redlined home over the past 40 years has only gained half the equity through appreciation that the average greenlined home has. Black homeowners have had to absorb the vast majority of this diminished appreciation, since they are “nearly five times more likely to own in a formerly redlined neighborhood than in a greenlined neighborhood.”

Today, there remains a gap in homeownership rates between white and Black families in the U.S. According to the Urban Institute, white people had a homeownership rate of 71% and Black people had a homeownership rate of 41%, as of 2016. At the same time, a study by the Joint Center for Housing Studies at Harvard University found that “there continues to be strong support for the association between owning a home and accumulating wealth.”

Clearly, redlining’s harm to Black communities did not end with its ban 50 years ago. It has left Black homeowners five times more likely to own homes that have only generated half the wealth of others. This lack of equity translates into substantially lower personal wealth. 

Redlining’s financial burden did not affect only Blacks who purchased homes. It also affected those who rented homes. Because neighborhoods were segregated by government policy and many rentals were made off-limits to Black renters, there was limited supply of rental units available to them and lots of competition, which drove their rental prices up. “In 1954,” Richard Rothstein writes, “the FHA estimated that African Americans were overcrowded at more than four times the rate of whites… because of the excessive rents that they were forced to pay.” The burden of these higher rental rates accumulated throughout the twentieth century, making it increasingly difficult for Black renters to build up savings. (Source: The Color of Law)

Conclusion

When reviewing this tragic history, it is clear that many structures of oppression were used to exclude, block, and prohibit Black people from the benefits of homeownership that accrued to white people. These systems of oppression included: 

• The Compromise of 1877 and Jim Crow laws: A betrayal of the post Civil War promises to Black Americans that led to a system of racist laws and relegated Black people to the status of second class citizens throughout much of the country. 
• The practice of Sharecropping: A legal means of keeping Black people tied to the property of white landowners, working under harsh and exploitative conditions. 
• The practice of Redlining: The federal government ensured that Black people could not take advantage of programs designed to expand homeownership and financial prosperity. 
• The practice of Blockbusting: Speculators used fear-mongering, manipulation, and predatory behavior to sell homes to Black people at inflated prices. 
• The practice of Contract-Buying: Black people were defrauded by white contract-sellers who used the promise of homeownership to steal wealth through loopholes and faulty contracts. 

While this is not an exhaustive list of the wrongs committed in the U.S. housing industry, the history above clearly shows how Black people were systematically prevented from homeownership and from the financial benefits they would otherwise have enjoyed. These injustices have become pillars of systemic inequality in America and have contributed to Black families having 10% the wealth per household of white families, according to the Brookings Institute. 

Part 2 of this series will build on Part 1’s history and move our analysis into the 21st century by examining predatory lending practices during the subprime mortgage crisis.