Calls for social and economic change gripping America have shed new light on the racial wealth gap. The statistics are as stunning as they are troubling: retirement-age black families typically hold less than 10 percent of the wealth of their white counterparts. But closing this gap means addressing persistent discrimination in markets that have gone unchecked for decades. We should start with homeownership.
As millions have come to understand, homeownership is one of the best ways to build wealth and secure a nest egg. Home equity makes up over one-third of household wealth—more than any other asset class. And yet, disparities remain with retirement-age black families holding less than half the housing wealth as white families.
Much of this inequity is rooted in decades-old “redlining” policies that denied minority families access to housing loans and insurance. This widespread practice systematically deemed applicants from certain communities unworthy of credit—frequently neighborhoods that had high minority populations. At the same time, real estate agents often refused to show homes to qualified minority families.
For black families today, the road to homeownership has fewer barriers—but obstacles remain. Unequal access to credit by lenders—including banks and, increasingly, non-bank “fin-techs.” Credit scoring algorithms that systemically penalize people of color. Appraisals that routinely penalize black neighborhoods. This list goes on.
The real heart of the problem, however, is related to steering: the practice by real estate agents of directing minority homebuyers away from safer neighborhoods with better schools and more opportunity for appreciation. This practice is alive and well today: a 2012 report by the Urban Institute plainly stated that “real estate agents tend to favor white homebuyers by providing information on and showing more available homes than in the case of equally qualified black homebuyers.”
This finding begs the fundamental question: why do even we have a system where realtors are able to steer their clients to homes in the first place?
Steering by realtors has wreaked havoc on American homebuying for over a century, driving up costs and driving down opportunities for all. The current system is and has been dominated by Multiple Listing Services—local associations of realtors that hoard information and influence—setting the rules of the market for roughly 19 in 20 aspiring homebuyers for the last 100 years. These rules tightly control how clients can pay their realtors, how information on listed homes are shared, and whether consumers can know what their realtor is being paid.
The problem with this structure is that it affords an outsized influence to the realtors by creating a black box that buyers cannot penetrate. At times this can mean the ability to direct qualified minority families away from the best neighborhoods. But the problem is even more widespread than that: a study by economists Panle Barwick, Parag Pathak, and Maisy Wong found that realtors systematically steered their clients away from properties that didn’t offer realtors at least a 2.5 commission, thereby enabling the fixing of prices. It’s harder to create wealth in homeownership when every buyer starts 5% to 6% down before they can even get to breakeven.
How do they do this? By having the buyer’s agent not paid by the buyer, as happens in every other service business in the US where an agent is paid by their client, but by having the buyside agent paid by the seller. This means that the buyside agent is not motivated by the goals and incentives of the buyer, but by the payment the seller is making to the buyer agent. This means that buyers, most often unaware of the fee that the buyer’s agent is paid on a home. and often told untruthfully that the buyer’s agent is “free”, get steered to what is good for the buyer’s agent, and not the buyer: that is homes with a higher fee for the buyer’s agent.
A better solution is a more competitive marketplace where consumers, not their realtors, decide what’s right for them—including whether or not to use a realtor, disclosure of the fees, and the buyer’s discretion as to how to pay them. The rise of the internet has helped democratize access to homebuying information, but it has not gone far enough: realtors have maintained a tight grip on market reforms while other intermediaries—such as stockbrokers and insurance salespersons—have allowed competition to open the doors of opportunity to millions of Americans.
Thankfully, change may be around the corner. Just last month, the Department of Justice sued the National Association of Realtors for a collection of anti-competitive practices largely related to obscuring the costs of realty services. Meanwhile, several class-action lawsuits have been filed against realtors for their anti-competitive practices. And only a few weeks ago, the realty startup company REX sued the state of Oregon for refusing to allow consumers to receive rebates on their real estate commissions.
Closing the racial wealth gap is an economic imperative, but the outsized importance of home equity means it will never happen unless we eliminate bias in housing markets. And we’ll never eliminate this bias as long as consumers are subject to the unseen incentives of their agents. If you want to change the score, sometimes you have to change the rules of the game.