Gentrification and the Wealth Gap

The Washington Post
The Washington Post

A bit ago, I wrote about how conversations about neighborhood change often paper over very real conflicts of interest among members of “The Community”:

A very common refrain in gentrification debates is that “the community should decide,” or that changes should “benefit the community.” But as Michael Kendricks points out, “the community” is always made up of many different people, with many different interests. Virtually any decision that’s made about a new housing development, or store, or transit project, will benefit some members of the community at the expense of others. That is politics, and anyone who has been to a neighborhood meeting about anything, large or small, has seen firsthand that neighborhoods are not above, or below, politics.

It’s far from an original observation to note that homeowners tend to benefit from gentrification, since rising property values directly increase their wealth. (Of course, they may also be squeezed if their property taxes increase much faster than their income.)

But we rarely acknowledge just how huge those stakes are. A new series from the Washington Post on the black professional class suburbs in Prince George’s County, Maryland (and Pete Saunders’ astute take on it) helps to quantify what happens to black wealth when home values don’t increase. The massive wealth gap between whites and blacks – several times larger than the income gap – is driven in large part by the difference in home values in mostly white neighborhoods compared to ones that are mostly black. And, as the Post explains, the extremity of that gap is in large part a result of the collapse of home values during the Great Recession:

The recession and tepid recovery have erased two decades of African American wealth gains. Nationally, the net worth of the typical African American family declined by one-third between 2010 and 2013….

Overall, the survey found, the typical African American family was left with about eight cents for every dollar of wealth held by whites….

Many researchers say the biggest portion of the wealth gap results from the strikingly different experiences blacks and whites typically have with homeownership. Most whites live in largely white neighborhoods, where homes often prove to be a better investment because people of all races want to live there. Predominantly black communities tend to attract a narrower group of mainly black buyers, dampening demand and prices, they say.

And the only obvious way to rebuild this wealth in the short to medium term is to raise property values in black neighborhoods. Which, whether or not that’s accompanied by racial change, is likely to price some renters and prospective buyers out.

This is not a “gentrification is clearly good, so stop complaining” argument. According to the Post story, only 43% of black Americans own their own home, so even strong gains in to property values would only go so far. But the issue of wealth deserves a more central place in the story of changing real estate values, and anyone whose knee-jerk reaction is to condemn rising home prices in non-white neighborhoods ought to have something to say about how else we can close the wealth gap.

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3 thoughts on “Gentrification and the Wealth Gap

  1. Interesting series, look forward to seeing how you and Pete build on it.

    Related reading/data on the Wealth Gap:
    http://www.pewresearch.org/fact-tank/2014/12/17/wealth-gap-upper-middle-income/
    http://www.pewresearch.org/fact-tank/2014/12/12/racial-wealth-gaps-great-recession/

    A significant portion of the first WP article describes the predicament of the Bryant family in Prince George County. I’d like to re-frame it a little bit, based purely on facts from the article:

    What the Bryant family owes on their mortgage today: $560K
    Estimated Value of the Bryant home today: $480K
    What the Bryant family paid for their home in 2001: $336K
    Out of curiosity what type of home did the Bryant family buy for its $336K?:
    3,600k sq feet of new-build suburban construction in the #1 majority black county in the US ranked by household income

    Bryant mortgage payment today: $3,900 / month, est. ~6% interest rate (depending on local property taxes, http://www.mortgagecalculator.org/). If they could refinance today, the going rate is ~3.75-4%, which would equal a payment of ~$2,600-$3,000. However, they likely cannot refinance because they now owe more than their home is worth. Put another way, they are effectively borrowing the max they can against the current value of their home (80% of $480) at the going rate (4%), and paying ~10% interest on the other $176K that they owe.

    Bryant mortgage payment at purchase: “~1/2 what it is today” = $1,950. That would imply a 30 yr fixed loan at ~4.5% on the original $336K minus the $20K down payment. The going rate in 2001 for a 30 yr fixed mortgage was ~7%! (Source: http://www.freddiemac.com/pmms/pmms30.htm). So even though it worked out for a while, at purchase the Bryant’s must’ve been borrowing on some sort of Adjustable Rate Mortgage, accepting the risk that their payments could go up and they could be priced out of the home they bought.

    Now read this from the article:
    “We tried to make decisions consciously,” said Jennifer, 45, who earned her undergraduate degree at Strayer University and holds a master’s degree from the University of Maryland.
    “We tried to put a lot of thought into what we were doing.”
    Their second daughter, Jayla, was born in 2004, and not long after that they decided to send Harmony to private school. Later, Jayla followed her sister to private school.
    But the bills became a strain, even with the family’s income, which was well into six figures. With their home’s value rising, they took a home equity loan.
    Then after receiving a phone solicitation, they refinanced into an adjustable-rate mortgage that offered a teaser rate that gave them the option of making smaller monthly payments. Little did they know at the time, but that deal increased the size of their loan if, as was often the case, they made only the minimum monthly payment.
    ….

    Look millions of people made a bad bet on their home value (black and white). They all must accept some responsibility for that, but this is also very clearly an example of “predatory lending”.

    The take away questions to me are:
    1. The Bryant family was well educated, high earning, and claims to have attempted to approach the homebuying process responsibly. How do we make sure people like that make better (less risky) personal budgeting decisions? Especially related to housing which is such a huge swing factor?

    2. Why were minorities disproportionately targeted for predatory lending?

    Answer: (Loan officers) “saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania”. They were also tragically and horrendously racist, commonly using terms like “ghetto” and “mud people”.

    Wells Fargo settled a lawsuit related to those actions for $175M. Where does the money go? For example, Baltimore is getting ~$60M of that. It will only go to the borrowers who would have qualified for prime loans but were steered toward subprime loans anyway (the Bryant family would not qualify). ~15K to ~4K homeowners (out of 34,000 minority borrowers attached to the suit). In my opinion, WF is getting off very easy here.
    http://www.washingtonpost.com/business/economy/wells-fargo-justice-department-settle-discrimination-case-for-175-million/2012/07/12/gJQAX66ZgW_story.html

    3. Why is Prince George’s county the #1 majority black county in the US ranked by household income? Are there success stories (lessons to evangelize) about generational income mobility, or educational attainment for minorities? Or is there some other drive involved?

    1. Thanks for this. I don’t feel like I have a great answer for #1. As for #3, that’s a good question. My impression is that DC has been a particularly strong black employment center in part because of the strong public sector, which tends to disproportionately employ black people – as opposed to cities like Chicago or Milwaukee, where the black middle class was built more heavily on industry, and suffered quite a bit more when those jobs left the country. But I’d also be curious about how much of a place like PGC’s economic status is about mobility, and how much is self-selection.

  2. Two further notes:
    1. From WP: “The data also reveals a crisis within the crisis: African immigrants, who make up 5 percent of the population of Prince George’s, accounted for nearly one-third of the families affected by foreclosure in Fairwood, according to a Post analysis of mortgage data provided by Lender Processing Services.”

    2. Comments from Fairwood residents:
    http://fairwood-community.blogspot.com/2015/01/fairwood-thriving-community-in-wake-of.html

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