The credit supply shock led white households in the U.S. to leave mixed neighborhoods at a faster rate than black households could move into them.
The collapse of the housing market in 2008 and the credit crunch that followed it continues to disproportionately affect minorities. Black homeowners in the United States are so likely today to return to renter status that the gains made by blacks in homeownership since the 1970s have been effectively wiped out. Black and Hispanic households have largely been frozen out of the recovery, suggesting those gains may be one-sided.
And it's not just the credit collapse that has left minorities worse off. Even at the height of the housing bubble, black households were losing out to white households in terms of access to neighborhoods with the best schools and public amenities. Research shows that U.S. neighborhoods actually grew more segregated as a result of the housing bubble, independent of the effects of the credit collapse that followed.
In a paper released earlier this year, researchers Amine Ouazad and Romain Rancière show how the credit boom affected the racial makeup of U.S. neighborhoods. Expanded credit led some black households to leave mostly black neighborhoods for more racially mixed neighborhoods, a move consistent with buying larger or newer homes in areas with better schools or more amenities. Yet at the same time, their report finds that the credit boom led still more white households to leave racially mixed neighborhoods for mostly white neighborhoods—meaning greater isolation for black households.
"It's an effect of mortgage credit that is the opposite of what policymakers might expect," Ouazad says. "Mortgage credit doesn’t allow minorities to climb the ladder into better neighborhoods."
Working with INSEAD, the International Monetary Fund, and the Paris School of Economics, the researchers used Home Mortgage Disclosure Act data as well as Census tract–level demographic data from the 2000 and 2010 Censuses. The resulting report evaluates mortgage data during the credit boom—from 2000 to 2006—for more than 350 U.S. metro statistical areas. What they found was a disparity of movements by white and black households that tracks directly with ease of access to credit.
Two charts in particular illustrate their findings. The first shows the change in white populations by the fraction of black populations for neighborhoods. The blue line—indicating tighter credit—shows little movement by white households into mostly white neighborhoods. But the red line—indicating loose credit—shows a dramatic shift, with white households fleeing racially mixed neighborhoods for mostly white neighborhoods.
"You see inflows of whites into neighborhoods with fewer than 15 percent of black households," Ouazad says. "You have outflows of whites from neighborhoods with more than 15 percent of black households."
For black households, the picture is different. Another graph demonstrates the change in black populations by fraction of black population in a neighborhood.
Given easier access to credit, black households moved into more mixed neighborhoods—but not at the rates that whites households were leaving them. And black households found little purchase in mostly white neighborhoods, Ouazad explains.
The paper also plots home price appreciation by fraction of black residents. Where credit approval was predicted to be high, households in mostly white neighborhoods appreciated at a faster rate than households in mixed or mostly black neighborhoods.
"What seems to be happening is that minority households are priced out of those mostly white neighborhoods," he says. "The average price of houses increases, but the standard of deviation increases. The variance of prices increases."
Robert Seamans, a researcher at New York University's Stern School of Business who is familiar with the French researchers' work on bank deregulation and segregation, notes that the credit expansion wasn't all bad for black households. His research has found that greater access to credit meant more black entry into entrepreneurship at various levels, for example.
"This increase in black entrepreneurship is unambiguously a good thing. Anything we can to expand that is a good thing," Seamans says. "The type of credit expansion that Amine and Romaine are observing—the amount of money involved is larger."
Ouazad says that Hispanic households don't move the needle much one way or the other. "Large increases in approval rates are correlated with high increases in black isolation," he says. "Hispanics don’t seem to affect the correlation that much."
During the boom, construction in mostly white neighborhoods couldn't keep up with demand, Ouazad says, meaning an increase in purchasing power that led to higher bids and higher values at the top. But mobility might be another way to explain the disparity.
"Empirically, what we observe is that black households tend to become homeowners in their own neighborhoods or in mixed neighborhoods," Ouazad says, "whereas white households used their mortgage credit to move into mostly white neighborhoods."
Is there a way to measure the effect of bank deregulation on neighborhood segregation in an absolute term? Yes: Absent the credit boom, black households would've had between 2.3 and 5.1 percent more white households as neighbors in 2010.
"Frankly, my expectation was that mortgage credit would allow minorities to get access to better neighborhoods, better homes, and more diverse neighborhoods," Ouazad says.