Kriston Capps is a staff writer for CityLab covering housing, architecture, and politics. He previously worked as a senior editor for Architect magazine.
A new paper looks at the science of a craven question: When does it make business sense to leverage racial fears?
Until 1956, brokers were expected to follow the code of ethics set forth by the National Association of Real Estate Boards: Don't try to sell houses in white neighborhoods to black homebuyers. Full stop.
For more than 30 years, the code read: "A realtor should never be instrumental in introducing into a neighborhood a character of property or occupancy, members of any race or nationality, or any individuals whose presence will clearly be detrimental to property values in that neighborhood."
Such an ethics code helped white homeowners to preserve their all-white neighborhoods in the face of change, especially in the North and West over the course of the Great Migration. Only in 1948, with the Supreme Court's decision in Shelly v. Kraemer, were states prohibited from enforcing these restrictive covenants.
"Blockbusting" emerged as a result. Mortgage brokers who had previously served as the gatekeepers of racial segregation became profiteering agents of racial transition. Through blockbusting, brokers intentionally stoked fears of racial integration and declining property values in order to push white homeowners to sell at a loss. Real-estate agents were profiting coming and going: They were cheating whites, who were selling their homes at below-market rates, and they were cheating blacks, who were buying these homes at above-market rates.
The practice of blockbusting has been illegal since the Fair Housing Act of 1968. Yet racial segregation remains a "defining feature of American cities," as Amine Ouazad, assistant professor of economics at INSEAD, puts it in a new paper. And whites remain sensitive to changes in the racial composition of white neighborhoods. Properties in a historically all-white neighborhood turn over faster when the share of minority households in that neighborhood reaches a tipping point, Ouazad explains.
"On the one hand, maintaining an all-white neighborhood ensures high prices and high brokerage fees, but results in low turnover," Ouazad writes in the paper. "On the other hand, triggering a racial transition generates sequential patterns of transactions and fees."
That's what Ouazad set out to answer: In a blockbusting model, when does it make business sense for a real-estate broker to trigger white flight? Or alternatively: How do brokerage fees anticipate a neighborhood's racial transition?
Establishing a dynamic model for blockbusting involves looking at some rather strange conditions, none more so than the "steady-state white neighborhood." It also involves variables such as the patience of real-estate agents and the racial preferences of white households. The model is complicated, but broadly speaking, it leads to some unexpected conclusions about racial preferences, neighborhood transition, and black household gains.
For starters, all-white neighborhoods with strong racial preferences aren't the leading candidates for white flight in a fee-based broker model. Their valuation of homes in even barely integrating neighborhood plummets fast; they then flee too quickly, leading to smaller commissions over a short amount of time.
In fact, Ouazad's model predicts that brokers will only steer transition in all-white neighborhoods when 1) they face little competition from other brokers, 2) anti-black racism of white households falls in an intermediate range, and 3) the number of offers coming in from buyers is neither too high nor too low.
So what can anyone do with this information? Strictly speaking, blockbusting is illegal. The practice hasn't been much seen since the 1980s. Research shows, however, that brokers match minority and white home-buyers with particular properties and neighborhoods. Why and when brokers feel that they have an incentive to match buyers and sellers of the same race versus when they match buyers and sellers of different races is poorly understood. Developing a model for equilibrium under blockbusting helps to explains the incentives that real-estate agents experience.
Even if the incentives as described in the model are not exactly what the same incentives that motivate brokers in the market today, these motivations are still relevant. Neighborhoods in cities remain highly segregated, and when they integrate, they tend to do so quickly, suggesting market forces at work that may or may not benefit white and black households equally.
"In a steady-state white neighborhood, black buyers do not experience any welfare gain," Ouazad writes. "In a blockbusting equilibrium, black households do experience welfare gains."
Historically, the motivations of blockbusting were unjust. For black home-buyers, the results were unjust on principle: Brokers were using anti-black prejudice to distort the market to their own ends.
Blockbusting was an improvement over strictly segregated neighborhoods, however marginal. Understanding why it happened in some neighborhoods (and not others) may help us discover why, today, some neighborhoods remain stubbornly segregated.