Morgan Stanley says housing discrimination has taken an enormous toll on the financial system
Suburbs of San Diego, California
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In addition to its human toll, racial housing inequality is exacting an economic price that has cost nearly 800,000 jobs, $400 billion in tax revenue and prevented about five million from owning homes, according to a Morgan Stanley analysis.
Disparities in home ownership are a root cause of wealth disparities across society, the Wall Street firm said in research that also looked at the rising unaffordability of rental housing and how that fits into the broader issue.
The analysis found that Blacks still have a harder time getting a mortgage than Whites, causing a snowball effect that results in lower credit ratings, pushing minorities into lower-quality housing and further into the fringes of society.
“Inequality compounds in exactly the same way as interest — small, nearly negligible differences accrue into significant gaps over time,” Morgan Stanley analysts said in a lengthy report. “Racial inequality in access to homeownership is real, is compounding existing inequality, and is contributing to a rental affordability crisis that’s especially acute among lower-income earners.”
Though rising, the homeownership rate for Blacks remains well below that of Whites, Asians and Hispanics.
The rate as of the third quarter of 2020 was 46.4% for Blacks, compared to 67.4% for Whites, according to the Census Bureau. The Black rate was 41.5% at the beginning of 2016; the gap with Whites then was 22 percentage points, while it currently is 21 points.
While Morgan Stanley said the gap can be explained somewhat by age, income and education, discrimination in getting home financing also plays a major role.
“Disproportionately high rates of home loan application denials for Black and Hispanic applicants are a key factor contributing to the homeownership gap,” the report said. Citing data from the Home Mortgage Disclosure Act, the report noted that 16% of Black households and 12% of Hispanics were refused a mortgage in 2019, compared to just 8% of White households.
Morgan Stanley floats several proposals to deal with the problem.
The report cites the likelihood that President-elect Joe Biden will institute more regulations that address inequality. However, it also states the need for more rental housing units rather than simply instituting different regulations for the existing stock.
There’s also a recommendation for greater scrutiny of how banks and other financial institutions are lending, especially for loans not backed up by government enterprises like Fannie Mae and Freddie Mac. Even when they get mortgages, Black and Hispanic families usually pay significantly higher rates – generally more than half a percentage point above the prevailing rate.
Morgan Stanley’s analysts also call for a rental and homeowner bill of rights, expansion of the Community Reinvestment Act, and the creation of a $100 billion Affordable Housing Fund.
The authors also address financial literacy and its importance for prospective borrowers to know what they’re getting.
Fixing the disparities could result in 4.9 million more households created, along with 784,000 jobs and $400 billion in tax revenue by bringing homeownership levels in line from a race standpoint, according to the analysis.
The report cites a number of initiatives from big Wall Street banks to address disparities: $1 billion from Citigroup and $30 billion from JP Morgan Chase, two name two.