Redlining: Another Reminder Why Government Should Not Be Involved in Housing

While scrolling on my Facebook feed last week, a good friend of mine posted an exposé from ABC News in Chicago called Our America: Lowballed. Part of this coverage is showing how homes in Black-majority and Latino-majority neighborhoods are appraised lower amounts on average than in white-majority neighborhoods. My friend bemoaned this disparity as an example of "historic and current structural racism." My friend then pointed out that this racial disparity goes back to a practice called "redlining."

Redlining refers to the practice of refusing to provide a good or service to a given geographical area. In a U.S. context, the practice of redlining was most prominent in the housing industry. The practice took off during the 1930s with the Home Owners' Loan Corporation (HOLC). Under the leadership of former President Franklin D. Roosevelt (FDR), HOLC was created in 1933 to refinance homes that were currently in foreclosure. As the Federal Reserve Bank of St. Louis mentions in its brief on redlining, many mortgage holders could not pay their debts, which meant losing their homes. HOLC set the standards to appraise the value of residential properties. If mortgage lenders did not comply, they did not receive financial backing from the Federal Home Loan Bank Board (ibid.). While HOLC was created in attempts to stabilize the housing market during the Great Depression, it came with some negative unintended consequences. 

In its assessment of to whom to lend money, HOLC made color-coded maps of major urban areas in 1935. Green was a "desirable" area, yellow was an area in decline, and red was deemed "disastrous." The redlined areas had "a large minority population, poorer households, and older housing stock." By limiting loans to minorities in the early and mid 20th century, minorities were deprived of the ability to use housing to build assets. 

There is some debate as to whether the HOLC maps caused the discrimination or if they were reflective of already existing discrimination. A Federal Reserve Bank of Chicago concluded that the boundaries created with the HOLC maps caused redlining (Aaronson et al., 2020 [see below]), as did a paper from the American Sociological Review (Faber, 2020). A National Bureau of Economic Research paper argues that the Federal Housing Administration (FHA) used block-level information that was independent of the HOLC maps to implement its own redlining (Fishback et al., 2021).

As if there were not enough reasons to despise former President FDR, we can now add redlining to the list. Whether it was HOLC or FHA, it was an entity from the federal government during the New Deal era that brought about the practice of redlining in the U.S. housing industry. Lenders charged higher rates of interest in redlined areas than their higher-graded counterparts. Properties in redlined areas were appraised at minimal values. All of this made it more difficult to keep property in good condition, which made it more difficult for those living in redlined neighborhoods to accumulate wealth, especially through housing. The effects of government housing policy and denying access to capital from the 1930s to when the Community Reinvestment Act of 1977 de jure ended redlining for good still has its impacts to this day, especially when it comes to poverty concentration. 

Richard Rothstein, who is a housing policy fellow from the Left-leaning Economic Policy Institute, wrote a book entitled The Color of Law: A Forgotten History of How Our Government Segregated America. In an interview, Rothstein stated that the United States "was much, much more segregated as a result of these federal policies than it was before, or would be today without them." In addition to the redlining, Rothstein outlines how zoning discrimination, subsidies, and tax regulations contributed to the disparities in housing we still see today. As Rothstein brought up in another paper he wrote, the federal government placed public housing in high-poverty, racially isolated neighborhoods, which exacerbated racial disparities.

We cannot change the fact that redlining took place, but there should be something that we could do. That is not an easy conversation to have given the multifaceted nature of the problem. The main purpose of today's piece was to illustrate how government intervention vis-à-vis redlining was and still is a problem. Even so, I can still throw out some solutions that I can always elaborate on in the future: 

• One is that we should stop with the zoning laws and land-use regulations. Part of why housing is so expensive in the United States is that these laws constrain housing supply. When supply decreases, prices increase. This ends up pricing out many from owning a home, particularly those who have been affected by redlining.
• Another piece of the puzzle has to do with education policy. In spite of Brown v. Board of Education, many schools remain redlined. Why? As a study from the Right-leaning Heritage Foundation points out, it is due to attendance zone boundaries and school district lines. Dallas Independent School District is an example of offering a school choice option without attendance boundaries to help with school integration. By having access to better education, socioeconomically disadvantaged children can break the cycle of poverty instead of being trapped by their zip code. 
• There also needs to be a conversation around how individuals can improve their credit score, as well as improving their overall access to credit. Credit provides a lifeline to afford in the medium-term such things as an automobile, a college education, or housing. Again, this is beyond the scope of today's piece, but there needs to be finance policy reform to provide all Americans access to financial tools that would make home ownership more viable. 
• While struggling with an answer to this very question, Cato Institute scholar Neal McCluskey suggested a combination of educating the public and using civic society to pool funds for African Americans to purchase homes.
• This one comes from the Manhattan Institute: create a friendlier tax environment. Higher property tax values depress property values, diminish wealth, and make it difficult to properly invest (ibid.). Especially since the poor face property taxes at twice the rate than homes in the top decile (Berry, 2021), removing some of the property tax burden off of lower-income households could mitigate the effects of redlining.

It does not matter that redlining has been illegal for 50 years. The redlining that existed for decades made it much more difficult for those in redlined neighborhoods, African-Americans in particular, to accumulate wealth. When the government intervenes in such a fashion for more than a generation, it does not surprise me that the impacts of redlining are still felt to this day. Redlining is one of the main reasons why African-Americans have a fraction of the wealth that other Americans have. We should try to find solutions to make sure that all Americans have housing access. In the meantime, we should sincerely ask ourselves how much we want the government to intervene in solving this problem, especially since it was government policy that caused this mess in the first place.