Inequities In Homeownership Drive The Racial Wealth Gap
Jack Ryan pens call to action, highlights industry practices that lower homeownership among people of color in America
Calls for social and economic change gripping America have shed new light on the racial wealth gap. The statistics are as stunning as they are troubling: retirement-age black families typically hold less than 10 percent of the wealth of their white counterparts. But closing this gap means addressing persistent discrimination in markets that have gone unchecked for decades. We should start with homeownership.
As millions have come to understand, homeownership is one of the best ways to build wealth and secure a nest egg. Home equity makes up over one-third of household wealth—more than any other asset class. And yet, reasonable opportunities to build housing equity have been denied to so many for so long.
For black families, the road to homeownership is paved with obstacles. Unequal access to credit by lenders—including banks and, increasingly, non-bank “fin-techs.” Credit scoring algorithms that systemically penalize people of color. Appraisals that routinely penalize black neighborhoods. This list goes on.
The real heart of the problem, however, is related to steering: the practice by real estate agents of directing minority homebuyers away from more attractive neighborhoods with better schools and more opportunity for appreciation. This practice is alive and well today: a 2012 report by the Urban Institute plainly stated that “real estate agents tend to favor white homebuyers by providing information on and showing more available homes than in the case of equally qualified black homebuyers.”
This finding begs the fundamental question: why do we even have a system where realtors are able to steer their clients to homes in the first place?
Steering by realtors has wreaked havoc on American homebuying for over a century, driving up costs and driving down opportunities for all. The current system is and has been dominated by Multiple Listing Services—local associations of realtors that hoard information and influence—setting the rules of the market for roughly 19-in-20 aspiring homebuyers for the last 100 years. These rules tightly control how clients can pay their realtors, how information on listed homes are shared, and whether consumers can know what their realtor is being paid.
The problem with this structure is that it affords realtors an outsized influence by creating a black box that buyers cannot penetrate. At times, this can mean the ability to direct qualified minority families away from the best neighborhoods. But the problem is even more widespread than that: a study by economists Panle Barwick, Parag Pathak, and Maisy Wong found that realtors systematically steered their clients away from properties that didn’t offer realtors at least a 2.5 percent commission, thereby enabling the fixing of prices. It’s harder to create wealth in homeownership when every buyer starts 5% to 6% down before they can even get to breakeven.
How do realtors control the market? By having the buyer’s agent paid by the seller—in sharp contrast to virtually every other comparable market in the economy. Every other industry, such as in law or investment banking, has established prohibitions for advocates of one party being paid by the advocate of another party – except this one. This means that the buyside agent is not motivated by the goals and incentives of the buyer, but by the payment the seller is making to the buyer’s agent. Buyers, often unaware of the fee that their agent is being paid, get steered to homes offering high commissions rather than what’s best for them.
A better solution is a more competitive marketplace where consumers, not their realtors, make decisions about how to sell their home—including whether or not to use a realtor and how much to pay for realty services. The rise of the internet has helped democratize access to homebuying information, but it has not gone far enough: realtors have maintained a tight grip on market reforms while other intermediaries—such as stockbrokers and insurance salespersons—have rallied to the allure of competition.
Change may be around the corner. Several class action lawsuits have been filed against realtors for their anti-competitive practices. The Department of Justice is investigating whether realtors’ behavior violates anti-trust law. And new startups are gaining a foothold by changing the rules of the realty market.
Closing the racial wealth gap is an economic imperative, but the outsized importance of home equity means it will never happen unless we eliminate bias in housing markets. We will never eliminate this bias as long as consumers are subject to the unseen incentives of their agents. If you want to change the score, sometimes you have to change the rules of the game.
—Jack Ryan is the Co-Founder and CEO of REX, the national real estate technology company connecting buyers and sellers online. The company is experiencing rapid growth during the pandemic by offering the greatest savings in the industry and meeting consumers’ specific needs with tools and services that make the real estate transaction fast, simple and transparent.
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