The impact of racial segregation, income sorting and risk-based mortgage pricing on housing wealth inequality: A comparison between urban regions in the United States

Abstract

Housing wealth is the cornerstone of U.S. households’ balance sheets and is among the largest stores of wealth in the United States. This study examines rising housing wealth inequality between 2005 and 2015 in an urban context. Past research suggests that rising income inequality, rising income segregation, or racial segregation could be a cause. Other research highlights the role of mortgage lending in generating inequality. The subprime and foreclosure crises have a well-documented association with housing inequality. Other work highlights risk based mortgage pricing more generally as a mechanism for widening inequality. I first examine the drivers of urban housing wealth inequality with a cross-sectional regression analysis in 2000-2005. I examine how income and racial segregation affect housing wealth inequality between cities prior to the crisis, and find that income inequality is weakly correlated with housing wealth inequality, but income and racial segregation have strong effects. Then, I examine if changes in segregation explain rising housing wealth inequality during the real estate and financial crises of the 2000s, or if mortgage market factors explain the rise. I find that changes in income inequality lead to higher housing wealth inequality; that rises in Black racial segregation again explain much of the increase, and that subprime lending does not fully account for that effect. Finally, I use granular data in a series of quantile regressions to understand the drivers of housing wealth inequality during the housing market recovery years of 2010-2015. I find that risk-based mortgage pricing and income segregation interact to produce significant and meaningfully large increases in housing wealth inequality over a 5-year period, from 2010-2015. Finally, I briefly discuss the ramifications for national housing finance reform, as well as for state and local mortgage programs and policies like inclusionary/exclusionary zoning. The current administration has put housing finance reform at the top of its agenda. Many proposals suggest partial or complete privatization of the government sponsored enterprises (GSE)s, which would lead to increase in risk-based pricing and market segmentation. Additionally, reform could disrupt GSE subsidization of state and local mortgage revenue bond programs. State and local actors should seek to preserve these capacities and increase local programs to guarantee mortgages and provide down payment assistance where possible. Cities should weigh carefully the costs of exclusionary zoning not only on income segregation, but on widening wealth inequality within their region. This dissertation contributes to the literature by situating the phenomenon of rising housing wealth inequality in a spatial, urban context and describing the impact of individual, neighborhood, and regional characteristics on the production of housing wealth inequality. I also tie these results to policy remedies at the national and local levels.