To reduce the racial homeownership gap, increase the housing supply

The shortage of affordable homes for sale is boosting housing prices and forcing potential buyers to compete for a shrinking supply of properties. Without policy changes, this housing shortage will restrain homeownership, further drive up prices, and limit opportunities for equitable economic growth. 

Today’s housing shortage has been building for more than a decade. Since 2009, housing demand has outpaced supply, while the share of starter homes (those under 1,400 square feet) built is at an almost 50-year low. In the second quarter of this year, median prices of single-family homes and condos are less affordable than historical averages in 61 percent of U.S. counties. The lack of supply and the increase in prices are most severe among lower priced homes, which are typically bought by first-time homebuyers.

The situation is particularly critical for Black and Hispanic households. More than half of these households rent, even though many have the credit characteristics to qualify for a mortgage. In 2019, 72 percent of white households were homeowners, while just 42 percent of Black households and 48 percent of Hispanic households were homeowners. These disparities, partly reflecting the impacts of structural racism, have denied Black and Hispanic households the same opportunities to build wealth, qualify for loans, and become homeowners. Today’s housing shortage threatens to continue to deny these families the opportunity to achieve the benefits of homeownership.

Federal policies can boost the supply of affordable starter homes and promote racial and ethnic equity by supporting more private investment into historically capital-starved communities, reforming local land use policies, and deepening public spending that targets affordable construction. These steps are an essential part of a robust toolkit to support equitable homeownership. 

Why the for-sale housing inventory matters for homeownership rates

The inventory of for-sale homes is strongly related to homeownership rates. The relationship between the number of renters, many of whom want to buy, and the number of available homes for sale correlates with the share of people who can become homeowners.

Since the early 1990s, a larger share of for-sale inventory has corresponded with a lower proportion of renters and a higher homeownership rate. Conversely, when for-sale single-family inventory is low, the share of renters is higher and the homeownership rate is lower. This pattern suggests that a larger inventory of homes for sale increases the likelihood that renters can become homeowners.

Today, as the number of renters grows, they are faced with a limited supply of single-family homes. In fact, our analyses show there are 24.7 renter households for every single-family home available for sale. This was nearly three times the 2006 low of 8.9 renter households for every home for-sale. High home prices are comparatively worse for renters who typically have lower incomes and fewer financial assets than current homeowners looking to move up or cash-rich investors seeking to broaden their portfolio. 

High home prices deny Black and Hispanic families the opportunity to become homeowners

The promise of homeownership is the bedrock of the American Dream. But for Black and Hispanic households, that dream has largely been deferred. When the U.S. faced a critical housing shortage after World War II, federal policies contributed to the construction of 21.3 million single-family homes between 1945 and 1960. But those policies systematically excluded and discouraged Black and Hispanic families from attaining and benefiting from homeownership — contributing to the stark homeownership and wealth gaps that persist today. 

Because Black and Hispanic families are more likely to be renters than homeowners, they account for a disproportionate share of households vying for first-time homeownership, a goal made even more difficult when facing racial bias in the homebuying process. Today’s limited home inventory and rising home prices make it even harder for these families to afford a home and become first-time homeowners.  

Federal policies can support affordable housing and advance equitable homeownership

The tight market has fueled house prices, and new construction, facing high regulatory and resource costs, hasn’t kept up with demand. This shortage has important implications for all potential homebuyers, but it is particularly significant for Black and Hispanic families who can’t afford to enter the market. Projections suggest that, without policy changes, the persistent racial and ethnic homeownership gaps will not close even by 2040.

Supporting affordable housing to advance equitable homeownership must be a key part of any federal economic policy. Doing so will allow more families to enjoy the benefits of homeownership, create jobs, and benefit the broader economy. 

Strategies to boost affordable housing and promote equitable homeownership can include: 

• supporting more inventory by addressing construction resource shortages and smoothing frictions that limit the number of homes that can be built offsite;

• expanding support for community development financial institutions (CDFIs) and minority depository institutions (MDIs) that specialize in mission- and relationship-based lending to small businesses, such as homebuilders, which often operate in communities of color;

• and promoting affordable housing by partnering with local governments to reduce zoning and other regulatory barriers to the construction of affordable homes and by investing in the preservation of the existing affordable housing stock.

Expanding the supply of affordable housing is a necessary step toward closing the racial and ethnic homeownership gap. Given the size of both the housing supply shortage and of the racial homeownership gap, policy action is critical to ensure all Americans have the opportunity to benefit from homeownership.

Michael Neal is a senior research associate in Urban Institute’s Housing Finance Policy Center.