Racial issues in housing markets: Introductory notes Introductory notes Stephen Malpezzi St h M l i James A. Graaskamp Center for Real Estate Wisconsin School of Business Wisconsin School of Business smalpezzi@bus.wisc.edu http://www.bus.wisc.edu/realestate
U.S. Population, 1990 and Census Middle Series Projections
White Black Hispanic Indian Asian
1990 188,601 29,374 22 549 22,549 1,802 7,076
Total
249,402 100.0%
75.6% 11.8% 9 0% 9.0% 0.7% 2.8%
52.8% 13.6% 24 5% 24.5% 0.9% 8.2%
Annual Growth 0.2% 1.0% 2 5% 2.5% 1.1% 2.6%
393,930 100.0%
0.8%
2050 207,901 53,555 96 508 96,508 3,534 32,432
Hi Hispanics i can be b off any race. Other O h categories i exclude l d Hispanics. Hi i
Does the housing market work for minorities? Does the housing market work for minorities? • • • • • • • •
Is there prejudice? Are markets segregated? Is there discrimination in housing markets? I th Is there discrimination in housing finance? di i i ti i h i fi ? In particular, how did the subprime market affect minorities? Do minorities pay different housing prices than whites? p y gp Are minorities less likely to own than whites? Does segregation/discrimination hinder minority economic progress? • Note: most research has been on black‐white differences. Much less research on Hispanics, almost none on American Indians, other groups of interest.
Incidence of Housing Problems g 30% 25% 20% Whites Hispanics Blacks
15% 10% 5% 0% High Rent
Inadequate Unit
Overcrowded
Mediian Rent-too-Income
Rent Burdens, Blacks and All Renters , 07 0.7 0.6 0.5 0.4
Blacks All Races
0.3 0.2 0.1 0 <3K '3-7 '7- '10- '15- '20- '25- '35- '50- >75 10 15 20 25 35 50 75 K Household Income Category
Homeownership Rates, B I By Income and Race/Ethnicity d R /E h i i Homeeownership p Rate
100% 80% White Black American Indian Asian Hi Hispanic i
60% 40% 20% 0% 1
2
3
4
5
6
7
8
Household Income Decile Source: 1993 AHS
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Avg. % D Dif. in Uniits Rec./Shown (Coompared too Whites)
Discrimination in Housing Availability Discrimination in Housing Availability
Units Shown
Units U it Recommended, Not Shown
0% -10% -20% -30% -40% 40% -50%
Source: Turner, Struyk & Yinger
Black Rentals Black Sales Hispanic Rentals Hispanic Sales
Two Common Segregation Indices Two Common Segregation Indices • Index of Dissimilarityy
1 N Black i Nonblack i 2 i 1 Nonblack 1 Black 0 blacks are evenly distributed 1 blacks are completely segregated • Index of Isolation Black i Black i Black Black Total Total i 1 i 0 blacks have maximum exposure to whites % black maximum isolation % black maximum isolation many studies divide by (1‐% black) to “standardize” N
S Source: C Cutler tl ett al. l 1999
R. Green and S. Malpezzi A Primer on U.S. Housing Markets and Policy
Source: Cutler et al. al 1999
R. Green and S. Malpezzi A Primer on U.S. Housing Markets and Policy
Patterns and trends in residential segregation Patterns and trends in residential segregation • Broadly, segregation seems “high” by many measures y, g g g y y – (Even though what’s “high” is hard to pin down) • Segregation tends to be highest in the Northeast and Midwest, lowest in the South and West • Segregation is lower in faster growing areas • Segregation is very high in retirement communities Segregation is very high in retirement communities • Segregation rose until 1960‐70 then fell
What affects residential segregation? What affects residential segregation? • See above: region, and growth rate g , g • Larger cities are more segregated – (does this hold up in multivariate analysis?) • History (e.g. restrictive covenants; see growth) • City “type” (retirement, university, military...) • Suburbanization – (Massey & Denton claim suburbs are also segregated, but evidence is they are much less so) evidence is they are much less so) • Education, income, social status • Fair Housing Act of 1968(?)
Three theories of residential segregation Three theories of residential segregation • Following Cutler et al. g • Port of Entry – see migration literature • Collective Racism – housing discrimination, restrictive covenants, redlining • Decentralized Racism – whites pay premia for living with other whites whites pay premia for living with other whites • Note: (1) and (2) imply that blacks pay more than whites for housing; (3) implies that black housing in black neighborhoods is discounted. Theories are not mutually exclusive.
Residential segregation, cont’d. Residential segregation, cont d. • If whites and blacks both prefer integrated neighborhoods; p g g ; but whites prefer (say) 15% black, blacks prefer (say) 50% black, Schelling showed this is an unstable equilibrium (the tipping model) tipping model). • Following Cutler et al., black premia decline over time; today it appears that blacks in segregated neighborhoods pay lower rents, ceteris paribus. (see comments below) • Racial attitudes of whites have generally improved (but % in favor of equal housing has declined from 65% in 1974 to 56% favor of equal housing has declined from 65% in 1974 to 56% in a recent study.)
What do we know about race and housing prices? i ? • Early studies (Kain y ( and Quigley) found blacks paid more for Q g y) p housing of equal quality than whites. • Many studies (esp. using post 1980 data) find blacks pay less f h i i bl k i hb h d for housing in black neighborhoods – Cutler et al.; Follain & Malpezzi; Chambers; Schnare and Struyk; etc. y ; – Black neighborhood discounts imply support for “whites pay premium for segregation” • New research is coming online from Paul Carrillo, Dirk Early and Edgar Olsen.
What do we know about race and housing transactions? i ? • There’s evidence for continued discrimination in sales and rental transactions – Less overt than pre‐1968 – Yinger; Turner; Wienk et al. – Newberger provides the rationale: profit maximizing brokers reflect perceived prejudices of their market even if brokers reflect perceived prejudices of their market even if they themselves are unprejudiced – Access to MLS is a leveler. How much will the internet affect MLS, access? • Not all racial differences in housing search are due to discrimination – Cronin; Galster et al.; Newberger; Turner
What do we know about race and housing fi finance? ? • We don’t know as much as most people think about p p discrimination in housing finance. The Color of Money got the ball rolling, but simple analysis of HMDA loan approval rates are useless rates are useless • Boston Fed, other studies find evidence of discrimination after controlling for income, other vars (most critical, hardest to find: credit history) – Munnell, Yinger, Galster, among others • Some studies find higher default rates among blacks (which S di fi d hi h d f l bl k ( hi h implies reverse discrimination?) – Berkovek, Canner, Gabriel & Hannan Berkovek, Canner, Gabriel & Hannan
What do we know about race and housing fi finance? ? • Econometric obstacles to testing in a multi‐step process are g pp formidable – Maddala & Trost, Phillips & Yezer, Yezer et al. • As financial markets get competitive and the secondary markets rule, if some lenders discriminated arbitrage p possibilities could arise. – But direct arbirtrage difficult since 2ndary market documentation doesn’t generally include race • Discrimination may be (witting or unwitting) at the loan officer level, rather than the institution. “Cultural affinity” affects how they treat marginal cases? affects how they treat marginal cases?
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Source: Robin Dubin et al. study of Cleveland
What do we know about race and the subprime market? b i k ? • “Subprime” Subprime is surprisingly hard to define/measure. is surprisingly hard to define/measure. One way is to use “high cost loans.” • In the big runup g p 2003‐2006, blacks were more likely , y to borrow in high cost‐subprime markets, even after controlling for income. – As in other lending studies, hard to get full dataset e.g. credit score; and endogeneity problem is still there. h
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The next foreclosure wave is tied to unemployment l White
Black
Males over 20 Females over 20 over 20 Both sexes, 16‐19 Males over 20 over 20 Females over 20 B th Both sexes, 16‐19 16 19
9.9% 74 7.4 25.3 17 1 17.1 12.4 41 3 41.3
Source: BLS, October 2009 data. 22
2009 Q2 MBA Delinquency Survey Q q y y
Loans Loans serviced 90 days past d due
All Loans
FHA & VA
Subprime
Prime
44.7 MM 44 7 MM NA
5.7 MM 5 7 MM 13%
4.9 MM 4 9 MM 11%
34.1MM 34 1MM 76%
3.9% 1 7 MM 1.7 MM
4.7% 0 3 MM 0.3 MM
12.0% 0 6 MM 0.6 MM
2.7% 0 9 MM 0.9 MM
16%
34%
52%
Percent of defaults
Source: Mortgage Bankers Association
Two theories of default • Pure “finance theory,” based on the value of the mortgage y, g g compared to the value of the house. • Cash flow/debt service view, based on ability to make payments. t
Take‐aways Take aways on default/foreclosure on default/foreclosure • While While there there’ss some (very little) sign of stabilizing some (very little) sign of stabilizing housing prices, smaller inventory, etc., defaults and foreclosures are still rising. • We’ve shifted from a subprime crisis to a (largely) crisis in prime mortgages that are underwater with unemployed or underemployed mortgagees. • We’ve had 10% unemployment before. • We’ve had mortgages underwater before. • But we’ve never had 25% of mortgages underwater (35‐40% in worst hit states) with 10‐12% 25 unemployment before.
Proposed policies Proposed policies • Some housing economists across academia and government are coalescing around plans to provide temporary mortgage support to the unemployed. • Two complementary plans: Wisconsin Foreclosure and Two complementary plans: Wisconsin Foreclosure and Unemployment Relief Plan (WI‐FUR), and the Boston Fed Plan. – Plan(s), in fact. Each group actually proposes a range of options th t that overlap. l – WI‐FUR focuses on a voucher, Boston Fed focuses on a loan. p g, p g p – We are co‐operating, not competing. We line up behind each other’s plan. • http://www.bus.wisc.edu/wcre/wi‐fur/ • http://www.bos.frb.org/economic/ppb/2009/ppb091.htm http://www bos frb org/economic/ppb/2009/ppb091 htm 26
WI‐FUR WI FUR in brief in brief • Temporary Temporary supplement to unemployment insurance supplement to unemployment insurance to help cover mortgage payments. • Goal: mitigate one of the two default/foreclosure g / “triggers.” p • Boston Fed plan is similar, but tied to a loan.
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Design questions Design questions • Coverage: unemployment insurance recipients? Or all g p y p unemployed? • Which unemployed are covered: mortgage holders? H Homeowners? All households? ? All h h ld ? • Loan or grant? • Payment amount: flat? Based on Payment amount: flat? Based on “Fair Fair Market Rent? Market Rent?” Or Or based on actual mortgage payment? • Timing, and sunset provisions?
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Selected References Selected References • James Berkovec, Glenn Canner, Stuart Gabriel and Timothy Hannan. Race, Redlining, and Residential Mortgage Performance. Journal of Real Estate Finance and Economics, 1994. • David Cutler, Edward Glaeser and Jacob Vigdor. The Rise and Decline of the American Ghetto. Journal of Political Economy, 1999. • Ingrid Gould Ellen. The High Cost of Segregation. Presentation to the NAACP, July 2009. • James Follain and Stephen Malpezzi, Another Look at Racial Differences in Housing Prices. Urban Studies, 1981. • William Frey and Dowell Myers, Racial Segregation in U.S. Metropolitan y y , g g p Areas and Cities, 1990‐2000. University of Michigan, 2005. • Richard Green and Stephen Malpezzi. A Primer on U.S. Housing Markets and Housing Policy. Urban Institute Press, 2003. (Second edition, with g y , ( , Paul Carrillo, forthcoming 2010). 29
Selected references Selected references • Elizabeth Laderman and Carolina Reed, CRA Lending During the Subprime Meltdown Federal Reserve Bank of San Francisco 2008 Meltdown. Federal Reserve Bank of San Francisco, 2008. • Stephen Malpezzi, Larry Ozanne and Thomas Thibodeau. Characteristic Prices of Housing in 59 Metropolitan Areas. Urban Institute, 1980. • Thomas Schelling. Models of Segregation. American Economic Review, Th S h lli M d l fS ti A i E i R i 1969. • Margery Turner, Raymond Struyk and John Yinger. Housing Discrimination St d S th i U b I tit t 1991 Study: Synthesis. Urban Institute, 1991. • Anthony Yezer, Robert Phillips and Robert Trost. Bias in Estimates of Discrimination and Default in Mortgage Lending: The Effects of Si lt Simultaneity and Self‐Selection. Journal of Real Estate Finance and it d S lf S l ti J l f R l E t t Fi d Economics, 1994. • John Yinger. Prejudice and Discrimination in the Urban Housing Market. I C In Current Issues in Urban Economics, ed. By Peter Mieszkowski tI i Ub E i d B P t Mi k ki and d Mahlon Straszheim, Johns Hopkins, 1979. 30