For most Americans, owning a home is part of the American dream. But for African Americans and Latinos, this part of the dream is rapidly slipping away. The dream of homeownership for people of color has been battered by predatory subprime lending, the foreclosure crisis, and high unemployment from the Great Recession. We will need strong leadership from Washington to restore the opportunity of homeownership for people of color.
The black homeownership rate inched higher with each passing year until 2004, when it peaked at 49.1 percent of black households owning their home. Since then, the black homeownership rate has dropped 3.7 percentage points to 45.4 percent in 2010, returning blacks to the homeownership rate they had in 1998. Given the current state of the economy and the high level of black unemployment, we can expect homeownership rates to continue falling for blacks.
For Latinos, their homeownership rate continued to rise until 2007, but their rate dropped the fastest in the recession's wake, declining 2.1 percentage points through 2010. (In the 2007-10 period, the overall average dropped 1.3 percentage points, and blacks saw a 1.7 point decline.) More declines in the Latino homeownership rate are expected because, as the Pew Research Center reports, "33% of Hispanic homeowners report being underwater [in terms of the value of their home], compared with 15% of blacks and 13% of whites."
How did we get here?
First, there was deregulation that allowed bankers to play fast and loose with lending practices. Then there was the "giant pool of money" from China and India seeking investment opportunities. People of every race and in many countries across the globe were hurt by an environment where mortgage brokers and bankers could make lots of money and suffer no repercussions for selling bad products.
But communities of color were hurt disproportionately because they had fewer conventional financial institutions providing mainstream products. Into this vacuum, the peddlers of high-priced loans stepped in. With the same income or even the same credit score, African Americans and Latinos were more likely than whites to receive high-priced subprime loans. Gregory Squires and other scholars have shown that, after taking into account other factors affecting subprime lending, the more racially segregated a community, the greater the amount of subprime lending that occurred there.
Race should not have determined whether one received a low- or high-price loan, but it did. The fact that blacks and Latinos were more likely to receive high-priced loans when they should have received lower ones loans increases their likelihood of suffering foreclosure.
The recession has also led to a large increase in the unemployment rates in communities of color. From July 2007 to July 2011, the white unemployment rate is up 3.9 percentage points, the black rate is up 7.8 points, and the Latino rate is up 5.4 points. The high and long-term unemployment that communities of color are experiencing also increases the rates of foreclosure in these communities.
To save the dream of homeownership in communities of color, we need a strong economy that is putting people back to work. Unfortunately, our leaders in the federal government have prioritized cutting jobs over creating them. The budget-cutting mania that has infected Washington will cost jobs. The government is a large employer, and government cuts mean fewer government jobs. Also, the aid that the federal government provides produces jobs indirectly, so less government aid also translates to fewer jobs. My organization, the Economic Policy Institute, estimates that the budget cuts from the debt-ceiling deal will cost the economy over 300,000 jobs in 2012. Increasing the numbers of the unemployed will only weaken an already anemic economy.
All of the serious macroeconomic analysts have shown that the American Recovery and Reinvestment Act reduced unemployment. As of last year, the Recovery Act was estimated to have reduced the overall unemployment rate by 1 to 2 percentage points. Because black and Latino unemployment is always higher than the overall rates, the Recovery Act likely reduced unemployment by about 2 to 4 percentage points for blacks and about 1.5 to 3 percentage points for Latinos. Communities of color, as well as the nation as a whole, need more economic stimulus.
But we also need to ensure that the financial sector operates fairly and responsibly. The creation of the Consumer Financial Protection Bureau is an important step in the right direction, but unfortunately there are forces gathering in Washington trying to weaken this agency. It is necessary for President Obama to stand firm behind this agency to make sure that it remains a strong watchdog for American consumers. We need strong consumer financial protection to prevent another subprime mortgage crisis, or something similar, from occurring.
A healthy economy and smart financial regulations are necessary for rebuilding the dream of homeownership for African American and Latinos. We know what steps are needed to get there. The question is: will our political leaders take them?
Follow Algernon Austin on Twitter: www.twitter.com/EconomicPolicy