Racial Segmentation in the Housing Market and the Racial Wealth Gap

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by Brian Higgins, Stanford University

This paper studies the role that housing market distortions play in explaining the large racial gap in wealth — a gap that has resulted in a disproportionate reliance of black households on Social Security in retirement.

The historical literature suggests that racial discrimination frequently limited the housing options available to black households. To evaluate whether these restrictions distorted the choices of black households, I use a combination of micro data and an equilibrium model of the housing market. I document large differences: black households are less likely to own houses; when they own houses, they own cheaper houses than white households with the same income; and even in the rental market black households have lower rental expenditures. While the differences were largest in the pre-civil rights era, they still remain.

Next I use an equilibrium model to evaluate whether discrimination can explain the patterns in the data. In the model, discrimination occurs in the form of segmented housing markets: black and white households may have different choice sets, and the resulting equilibrium outcomes — prices and allocations — can differ in each segment. I estimate the model with data from 1940 to 2020 to determine the degree of segmentation — initial results from the rental market suggest that black households in 1940 were restricted to lower quality houses, and this resulted in higher equilibrium rents for these houses.

Since higher prices can distort wealth accumulation for black households, I also consider these forces in a dynamic model in which households save for retirement. I will use the model to quantify the impact of historical market segmentation on the current racial wealth gap, to evaluate the role of Social Security as a mitigating force, and to investigate potential remedies to close the racial wealth gap.

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