Racial Disparities in Housing Returns
We document the existence of a racial gap in realized housing returns that is an order of magnitude larger than disparities arising from housing costs alone, and is driven almost entirely by differences in distressed home sales (i.e. foreclosures and short sales). Black and Hispanic homeowners are both more likely to experience a distressed sale and to live in neighborhoods where distressed sales erase more house value. Importantly, absent financial distress, houses owned by minorities do not appreciate at slower rates than houses owned by non-minorities. Racial differences in income stability and liquid wealth explain a large share of the differences in distress. We use quasi-experimental variation in loan modifications to show that policies that restructure mortgages for distressed minorities can increase housing returns and reduce the racial wealth gap.
We thank seminar participants at MIT, the Federal Reserve Bank of Philadelphia, the Stanford SITE Conference on Housing and Urban Economics, and the University of Illinois Urbana-Champaign for valuable comments and suggestions. We are particularly grateful to Peter Ganong, Kristopher Gerardi, Christopher Palmer, Paul Goldsmith-Pinkham, Ingrid Haegele, Krisztina Orban, Troup Howard, Jonathan Parker, James Poterba, Emmanuel Saez, Juan Carlos Suarez Serrato, Lawrence Schmidt, Antoinette Schoar, and Danny Yagan. We thank Calvin Wright for excellent research assistance. This work was supported by the Fisher Center for Real Estate and Urban Economics at UC Berkeley and the National Institute on Aging, Grant Number T32-AG000186. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.