Race and the value of owner-occupied housing, 1940–1990

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Abstract

We use data from the Integrated Public Use Microdata Series (IPUMS) to document racial convergence in the value of owner-occupied housing from 1940 to 1990. Most of this convergence occurred before 1970, as black and white-owned units became more similar in terms of housing characteristics and as black and white homeowners became more similar in terms of their household characteristics. During the 1970s, convergence in values stalled despite continued convergence in housing and household characteristics; thus, the ‘unexplained’ or residual portion of the racial value gap increased. Because changes within metropolitan areas are central to the post-1970 story, we go on to explore the changing empirical connection between urban residential segregation and the racial value gap.

Introduction

In the United States, racial differences in wealth are large relative to racial differences in income (Blau and Graham, 1990, Oliver and Shapiro, 1995).1 Such gaps exist across all types of assets, but those related to housing are particularly significant because housing equity is a major component of household wealth, particularly for African Americans.2 There are three proximate causes of the racial gap in housing equity: differences in rates of home ownership, differences in the value of owner-occupied housing, and differences in the ratio of housing values to housing equity, or equivalently, differences in debt–equity ratios (Long and Caudill, 1992, Wolff, 1998). This paper offers new, long-run insights into the evolution of the second proximate cause: differences in the value of owner-occupied housing.

In addition to its connection with the racial gap in wealth, the racial gap in property values reflects differences in well-being derived from housing services. The asset value of housing depends on the flow of services associated with residing there. These services include not only shelter and comfort, but also access to schools, employment, transportation, retail establishments, security, and various public goods. Thus, a great deal of information about households’ economic quality of life is embedded in the housing values we examine here.

Despite the issue’s potential importance, economists and economic historians have not written much about the long-run trends in racial differences in housing market outcomes. Our previous work uses the Integrated Public Use Microdata Series (IPUMS) of the federal population censuses to study the evolution of racial differences in the rate of home ownership among male household heads from 1900 to 1990 (Collins and Margo, 2001). This paper documents and analyzes racial differences in the value of owner-occupied housing over the period 1940 to 1990, again focusing on male household heads, though with some discussion of the significance of rising rates of female headship. Our primary methodological approach is simply to decompose the racial gap in mean housing values into two parts. One component captures racial differences in observable housing characteristics (for example, the number of rooms) that are strongly correlated with housing values. The other is a ‘residual gap’ which reflects the unobserved correlates of race, including unobserved differences in housing and neighborhood quality. Long and Caudill (1992), which examines racial differences in housing values in 1970 and 1980, is perhaps the most closely related paper to this one.3 Our study differs from theirs in that we observe and discuss a much longer time frame, and we explore the connection between residential segregation and the racial value gap in metropolitan areas.

Some of the results of this paper will be familiar to students of racial differences in housing market outcomes, but other results are more surprising and provocative. Between 1940 and 1990, the average value of black-owned homes increased substantially relative to that of whites, primarily due to convergence in housing characteristics that are strongly correlated with housing values. But there was also a decline in the residual gap. Remarkably, most of the post-1940 increase in the black/white ratio, and all of the post-1940 narrowing of the residual gap, occurred before 1970.

We focus our investigation of the post-1970 experience on metropolitan areas. In particular, we link our investigation with recent research which has revived scholarly interest in the economic effects of persistently high levels of residential segregation (Massey and Denton, 1993, Cutler and Glaeser, 1997). We find that on the eve of World War II, the racial gap in home values was smaller in more segregated cities, but over time, the correlation between segregation and the relative value of blacks’ housing turned strongly negative. One interpretation of this phenomenon emphasizes adverse changes in blacks’ relative neighborhood quality, particularly in central cities, but additional research, including detailed city-level case studies, will be required to isolate and identify such neighborhood effects.

The paper is organized as follows. In Section 2, we describe the data and document the changes in the racial gap in housing values over time by region and metropolitan status. In Section 3, we decompose the sources of racial convergence in housing values, initially based on OLS regressions and samples of homeowners, but then allowing for selection into the homeowner category according to household characteristics. In Section 4, we explore the connection between residential segregation and the racial housing value gap; we note how dramatically that connection has changed over time; and we briefly discuss some hypotheses and evidence related to that change. We present our conclusions and suggest some extensions for future research in Section 5.

Section snippets

The IPUMS data

With the exception of 1950, each IPUMS sample since 1900 contains information on home ownership. The census classified dwellings as owner-occupied if the owner lived there, though it did not explicitly identify who within the household actually owned the home. Following census convention, we assume that if the home was owned, it was owned by the household head. Starting in 1940, information is available on property values for owner-occupied homes, and beginning in 1960, various housing

Housing values and housing characteristics

Although Table 1 sheds some light on when and where there were changes in the black/white value ratio, considerably more insight can be derived from regression analyses of the IPUMS samples. For simplicity, we first analyze the samples of homeowners described above. Later in this section, recognizing that home ownership is not randomly distributed across household heads, we allow for selection into ownership on the basis of several household characteristics.

Supposing that the value of a

Residential segregation and the housing value gap

A high degree of racial residential segregation has long been one of the most striking features of American cities (Cutler et al., 1999). To a large extent, throughout the twentieth century, white and black families have lived in separate parts of cities. In thinking about the racial gap in property values within metro areas, therefore, the potential significance of residential segregation cannot be ignored. This section documents an important shift from 1940 to 1990 in the empirical connection

Conclusion

The value of a home is directly linked to the flow of consumption services enjoyed by its residents, and therefore housing values convey useful information about households’ economic well-being. Furthermore, housing values are a piece of a larger and more complex story about wealth holding and wealth creation in the United States. Housing equity has long been a significant component of household wealth, and at least since the Depression, home-owning households have, on average, benefited from

Acknowledgements

Collins is Assistant Professor of Economics at Vanderbilt University and Faculty Research Fellow at the National Bureau of Economic Research; Margo is Professor of Economics and History at Vanderbilt University and Research Associated at the National Bureau of Economic Research. We are grateful to two anonymous referees, Stanley Engerman, Edward Glaeser, Matthew Kahn, Jens Ludwig, Peyton McCrary, Gary Solon, and workshop/conference participants at the 2000 ASSA meetings in Boston, Columbia

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