It’s a crisis when home prices rise, and it’s a crisis when they don’t

A farmer's market in Auburn-Gresham. Credit: Greater Auburn-Gresham Development Corporation
A market in Auburn-Gresham. Credit: Greater Auburn-Gresham Development Corporation

DePaul’s Institute for Housing Studies has a really interesting post about the differing paths of Chicago neighborhoods through the recession. Readers will be shocked to hear that in some places, mostly on the North Side, housing values have rebounded quite strongly, while in others, especially south and west of downtown, they haven’t – and as a result have seen barely any appreciation for 15 years.

So what? The report imagines two families in 2000:

The first family buys their house for $320,000, the median value properties in West Town at the time… The second family buys a home for $85,000, the median value of properties in 2000 in Auburn Gresham.

Assuming both families did not take on added mortgage debt, the house in Auburn Gresham today is worth $86,500, only $1,500 more than in 2000, before the rise, bust, and rise of the market, for a rate of return of zero. Any equity in the home was built solely by paying down the mortgage principal.

Meanwhile, the house in West Town has more than doubled in value (a 119 percent increase) and appreciated to nearly $700,000. On top of any principal paid down on the mortgage, the owners have built an additional $380,000 in home equity.

In other words, the Wicker Park family is now several hundred thousand dollars wealthier than they were in 2000; the Auburn-Gresham family is not. And, of course, though both of these families are imaginary, we know that the Wicker Park family is probably white, and the Auburn-Gresham family is almost certainly black.

This is more than a theoretical concern. Though we often talk about racial differences in affluence in terms of income, wealth might actually be a much bigger deal. Wealth is why some people have college funds, and others don’t; why some people can retire comfortably, and others can’t. It’s why an employment or medical crisis is a major problem for some people, and a total catastrophe for others. Wealth is what keeps people in the middle class through rough patches. In sum, wealth can be more determinative of your life chances, and those of your family, than income in any given year.

Since real estate makes up a massive proportion of household wealth – more than half for blacks, and about 40% for whites – it contributes massively to the racial wealth gap. As of 2013, the median white family held $134,000 in net assets, compared to $11,000 for the median black family. And as the Washington Post covered earlier this year, looking at what you might call the Auburn-Gresham problem in the DC suburbs, the failure of homes in black neighborhoods to hold their value and appreciate is a major force for destabilization of entire neighborhoods, not just an economic scourge for individual black households.

WIcker Park homes that you should have bought in 2000. Credit: YoChicago

What makes this comparison interesting, though, is that from the perspective of the most visible housing policy debates, it’s Wicker Park that has a housing crisis. When housing prices rise quickly, people whose incomes don’t rise accordingly get squeezed. That is, in fact, a big problem, and Wicker Park has become more segregated along class and racial lines as a result.

But if the racial wealth gap is a crisis, then the failure of housing values to rise in places like Auburn-Gresham is a crisis, too. This is especially true when it happens systematically to entire swaths of the city and entire subsections of the population. After all, it’s not a coincidence that black neighborhoods keep seeing the worst home price appreciation: black neighborhoods are systematically undervalued, because virtually no one who isn’t black is willing to live there, which leads to a collapse in demand. Other forms of systematic discrimination, including in the provision of amenities, also creates a kind of push factor, even for black households. (Recall that this is how we get the “racial arbitrage” theory of gentrification.)

It’s tempting here to ask for some sort of goldilocks solution: a moderate but steady increase in housing prices, so that people can build wealth without gentrification-related displacement. The problem, of course, is that displacement happens on a sliding scale. It’s not as if everyone will be priced out if rents increase 10%, but no one if they only increase 5%: every little bit that a neighborhood’s housing gets more expensive (that is, every little bit that homeowners build their wealth) tips someone from being able to afford to stay in their home to not. So it really is quite directly a tradeoff between how many people you want to price out of the neighborhood, and how much you want to allow other (especially black) people to build wealth from their homes the way white people are able to. At least, that will be the case as long as waiting lists for housing vouchers or public/subsidized housing units are years-long, rather than covering everyone who needs them.

* Of course I’m assuming here that owner-occupied home prices and rental prices track each other pretty closely. Obviously there are times where that isn’t the case, but over the long run, it tends to be.

6 thoughts on “It’s a crisis when home prices rise, and it’s a crisis when they don’t

  1. I wrote about a somewhat similar idea a while back, though on a citywide scale, basically comparing places like LA and D.C. to places like Chicago, Atlanta, and Cleveland:

    The general finding was that homes were much more expensive in the former set of cities in 2000, and they appreciated much faster between 2000 and 2013. Since those homes were already expensive in 2000, they were out of reach to lower-income families and the largest gains accrued to the wealthier households: rich people bought homes in Boston and saw their values increase by about 80 percent, or several hundred thousand dollars, in 13 years; poor people bought homes in Cleveland and saw them increase in value by about 20 percent, maybe a few tens of thousands of dollars, over the same time period. Absolutely no idea what the solution is to a problem like that, but it’s obviously huge, and your post makes it clear that this is a neighborhood disparity as well as a city disparity problem.

  2. If you’re buying a house in order to sell it for more money later – or to have the option of selling it for more money later – then it’s called speculation, even if it’s a house you happen to live in. It’s bad form for governments to encourage that, with Fannie Mae, capital gains tax exemptions, differential property tax regimes, mortgage tax deductions, and failure to tax imputed rents. Hedge funds should speculate on houses and other risky assets. People should not. Think about it: the time when you need the cash the most is when you’ve just lost your job, and this tends to happen in a recession or in a local slump, which is when your house price is the most likely to have fallen. It has the same problem as when companies pay workers in their own stock; it’s supposed to build loyalty, but for people who don’t have the base pay of a CEO, it just means that the workers’ savings will evaporate precisely when they need them the most. Investing in safer and more liquid assets may not have the same returns as real estate, but your savings account will be there when you need it. Or, if you do want the returns, buy a mutual fund. It’ll go down in a national recession, but if it’s just your own area declining (hi, Detroit), it’ll still be there.

    There’s this weird American notion that home ownership is the only way. Over decades, the feds have built a national culture that’s convinced itself that renters are boors and louts who will trash their homes and their neighborhood just for fun. (That may be why low-home ownership Switzerland is such a terrible place to live in…) This feeds into the hate for poor people and for city-center residents, who are more likely to be renting, but generally, the renter is the foreigner: simultaneously poor (lazy, criminal, dirty) and rich (privileged, rapacious, displacing), and always a threat to the community ™ and its longstanding values.

  3. I generally agree w/ the commenter above (increasing value, driving wealth creation thru real estate ownership should not be the goal) but would note a couple items that demonstrate the priority for home price stability or sustainability:

    A. to the extent household sizes change, it’s perfectly reasonable for empty nesters to downsize from the home they bought while they had children in order to fund their retirement. Fewer people require less house.

    B. the stock of housing available for purchase vs for rent is substantially different. This is primarily driven the increased overhead for SFHs (maintenance, service, marketing/tenant renewal, etc…). The SFH rental business was traditionally run by mom & pop / small business outfits, whereas multifamily rentals have always been far more scalable.

    1. Ad B, how much of it is due to different socioeconomic and demographic profiles for renters and buyers? If I show you an apartment building, I don’t think you’ll usually be able to tell whether it’s a condo or a rental, even ignoring the issue of condo owners renting their apartments out.

      SFH is a different issue. I think house rentals are generally uncommon, but nearly everywhere in the developed world, urban and suburban SFHs have mostly been built in an era of high home ownership, in areas with lower price-to-rent ratios than city centers. A mass-produced suburb like Levittown could have probably been built as a rental community if government incentives had aligned that way.

  4. I also wanted to note that I think there’s a significant problem with the West Town analogy. Just because the median home price doubled does not mean that a house worth the median in 2000 is worth double today. There has been a significant amount of redevelopment in the neighborhood including a vast amount of new capital contributed to luxury properties by builders, landlords and home owners. The median or “house price in the middle of all the others” is very likely to not be the same property it was 15 years ago.

    Also it’s ~3 miles from the loop vs Auburn Gresham’s ~10 miles. Given the “new donut” theory where proximity rules, you should at least be looking at Bronzeville if you’re looking to draw purely race based conclusions, which is +39% instead of Auburn Gresham’s +2% over the period. Also for example, Uptown/Rogers Park is +69% vs Lakeview / Lincoln Park’s +73%

  5. I agree with Alon Levy and would add that it seems especially poor policy to encourage speculation by homeowners in a city that has a renter majority, as Chicago now does.

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