How the subprime crisis hit blacks hardest
America’s minorities, it seems, can’t catch a break when it comes to housing. Before the subprime boom, they were much less likely than their white counterparts to be able to get a mortgage. Then, when the subprime boom started, they were much more likely to be sold a predatory mortgage.
A new study by Douglas Massey and Jacob Rugh of Princeton does a great job of quantifying this effect and nailing it down. My colleague Nick Carey has a story about it, but you should read the study yourself: I’ve uploaded it here and embedded it below.
The study is pretty clear. The authors have built a model which explains foreclosure rates, using a large number of variables, including things like overbuilding rates and house-price appreciation as well as demographics including credit scores. And it turns out, after crunching the numbers and doing the regressions, that living in a racially-segregated area is an important predictive factor in terms of how likely you are to experience foreclosure:
Whether measured in terms of residential dissimilarity or spatial isolation, segregation of African Americans is a powerful and highly significant predictor of the number and rate of foreclosures across U.S. metropolitan areas. For instance, a .1 unit increase in black dissimilarity is associated with 37 percent more foreclosure actions and a 34 percent increase in the foreclosure rate.
(“Black dissimilarity,” here, is a measure, ranging from 0 to 1, of how black a neighborhood is compared to the country as a whole.)
To put it another way, an increase of one standard deviation in a neighborhood’s black dissimilarity increases the foreclosure rate by 1.68 percentage points — which is a very large amount, given that the overall foreclosure rate is 4.14%. To put those numbers in perspective, a one-standard-deviation increase in factors like housing starts or house-price appreciation or even unemployment fails to increase the foreclosure rate by even 1 percentage point.
The authors conclude:
By concentrating foreclosures in metropolitan areas with large racial differentials in subprime lending, segregation structured the causes of the crisis, as well as the geographic and social distribution of its costs, on the basis of race. Segregation therefore racialized and intensified the consequences of the American housing bubble.
It’s hard to read this without being reminded of this chart:
Obviously, there’s more going on in Detroit than just racial segregation and discrimination. But it’s surely an exacerbating factor.