The Hidden Racist History That Still Affects Homeownership

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Most people are just trying to find a single-family home that they can grow into and call their own. It’s the classic American Dream. Unfortunately, too many minorities walk into the bank to get a loan and walk out rejected—even though they have good credit and the same income as a white applicant who ends up being approved. In fact, minorities are twice as likely as white people to have their mortgage applications denied.

So, is this straight-up racism? Yes, in a way. Home mortgages are based on credit and wealth, but racist housing policies of the past have created less credit and wealth for minority families over time.

The American Dream Denied

Post-war American suburb

These racist housing policies were actions taken by the Federal Housing Administration in the 1940’s and 1950’s. “The Federal Housing Administration grew out of the New Deal and the Great Depression,” explains Zillow economist Aaron Terrazas. “President Roosevelt tried to intervene and help them recover the housing market. After the end of World War II, the program was repurposed to help returning veterans buy their first home.”

After the war, the government oversaw the development of classic American suburbs, places like Levittown in New York and Panorama City in Los Angeles. “Very affordable homes were sold to the middle class in these suburbs because they received federal subsidies in order to build them,” explains Terrazas. “Except non-white vets, be they African-American, Hispanic or Asian, were prohibited to access these homes because of the FHA’s underwriting policies. Even if they had served their country.”

The American Dream—as subsidized by the federal government—was exclusively for white Americans at that time.

The Generational (Wealth) Gap

American vets

The FHA’s racist policies were outlawed and changed with the Civil Rights Act of 1968, but you can still see the scars and the legacy of the policies today. “The American housing market grew for about 30 years,” says Terrazas. “The wealth that was created for those families who were able to claim their home in the 1940’s or 1950’s contributed an enormous amount to family wealth that passed on from generation to generation.”

“Today, the typical African-American income is about 60 percent of the typical white income,” says Terrazas, “but when you look at wealth, the typical African-American only has about 5 to 6 percent of the wealth of a typical white family.”

This wealth is really driven by the housing market—meaning that minority families have missed out on 30 years of wealth building. A lack of generational wealth such as this is creating an environment where they are regularly denied home mortgages.

Catching Up to History

American family

With this amount of wealth-building opportunities being denied over generations, is there anything that can be done to start leveling the playing field so minority families can catch up?

“The most important area for action is really about lowering the cost for home building,” says Terrazas. “There’s a lot that the federal government and the state and local governments could do to lower those costs. Perhaps things like making lower cost loans available to home builders. Or ease zoning requirements in local communities, which allows for some denser development. So many communities are zoned for a particular type of home, which really protects the interests of long time homeowners, to the detriment of first time and entry-level home buyers, the vast majority of whom are people of color.”

Terrazas also prescribes raising awareness of specific programs to encourage minority homeownership: “If you don’t have a family network that has been homeowners to help educate yourself, this can be a daunting decision. But there are programs out there, through lenders, through real estate groups, that can help first time home buyers who can’t rely on a family network to understand, ‘What is a mortgage? How do you get a mortgage? What are the obligations you’re taking on?’”

Whether it’s the cost of building or a lack of awareness of available home buying options, race should not stop people from owning homes. It is shameful that so many minorities are still denied loans, even if they get good jobs, promotions at work, make more money and develop better credit. Even after all of that perseverance to achieve the American Dream.