Segregated housing markets and the erosion of black wealth: New evidence from pre-war cities

Prottoy A. Akbar, Sijie Li, Allison Shertzer, Randall Walsh

The Great Migration is associated with increased residential segregation in northern cities, inflating rents and eroding housing values. This column uses new data at the block level to estimate the scale of price changes. Segregation and ghetto expansion meant that much of the gain in earnings for black families who moved north were cancelled out. The effects of this are still felt today.

The Great Migration, when millions of African Americans left the Jim Crow south for northern cities of the US, is a key way in which black American families tried to improve their economic standing in the middle of the 20th century (Boustan 2016). But the Great Migration was also associated with increased residential segregation in northern cities, inflating rents and eroding housing values. This significantly undercut the gain in income for black people who migrated from the South (Akbar et al. 2019).

Known and unknown causes of disadvantage

Moving north was associated with both increased wages and improved occupational standing (Collins and Wanamaker 2014). Yet these earnings gains failed to close the racial wealth gap, which persisted and, in some cases, even worsened. Research has highlighted the role of pervasive discrimination in the labour market and educational system in preventing black families from accumulating wealth at the same rate as white families. Social scientists have also argued that government at all levels supported policies that contributed to residential segregation by race, and depressed black wealth (Rothstein 2017, Aaronson et al. 2017).

There is also consensus that real estate markets and housing policy helped to create the disadvantage faced by black families. But economists know little about the channels through which segregated housing markets eroded black wealth. The lack of empirical work is largely because urban segregation during this era occurred one city block at a time, and so researchers lacked data that linked housing prices and demographic characteristics at the fine level of spatial detail that would have been necessary to explore these changes.

The scale of the transition

We introduced novel data on pre-war American city blocks to overcome these limitations. Using the federal censuses of 1930 and 1940, we were able to match millions of addresses across the decade and construct detailed demographic data at the block level. Importantly, our data contains housing value and rents, allowing us to track the evolution of the price of each home, and its exposure to city-block-level changes in racial composition during the Great Depression. Between 1930 and 1940, the black ghetto expanded significantly.

Using this data, we can provide the first description of residential segregation by race at the block level in pre-war American cities. The share of black families living on transitioning blocks increased sharply over the decade, with nearly 13% of black households in 1940 living on blocks that had been virtually all white in 1930. By 1940, 62% of black families lived on blocks that were virtually all black.

This means transitioning blocks represent a significant share of housing for black families. The price dynamics for these blocks can be used with our new linked sample to estimate the causal impact of racial segregation and white flight on housing prices faced by black households in general.

By using repeated observations of addresses that were occupied by white homeowners at the start of the decade, we found that black families paid a rental premium of roughly 40% relative to white families living in equivalent housing on blocks that did not transition (86% of the black families in our sample were renters). Occupancy soared as well, increasing by about 40%.

The scale of price changes

When black families wanted to buy a house, this also commanded a premium. The first black arrivals on newly transitioning blocks were much more likely to buy their home then to rent it. To induce incumbent white owners to sell, these pioneers typically paid a premium of about 15% relative to the prices paid by white homeowners on similar blocks that did not transition. Once these pioneers had paid an inflated price, home values declined throughout the racial transition process. By the time a block had transitioned to majority-black, on average homes had lost 10% of their pre-transition value.

Figure 1 shows the increase in rents and decline in home values across the range of black share at the block level. The figure shows the effects for homes that were single-family, owner-occupied, and located on a block that was at most 5% black in 1930. We controlled for 1930 occupancy and price at the address level, at block-level for number of households and share of renters, and fixed effects. We also scaled both the overall price and rent effects, relative to a house that remained owned on an all-white block. Price changes are most significant after a block attained majority black status.

Figure 1 Effect of racial transition on house sales and rental prices in northern US cities, 1930 to 1940

Source: Akbar et al. (2019)

The magnitude of price declines varied significantly across cities. Cities that saw the largest inflows of black migrants during this period (Chicago, Philadelphia and Detroit are examples) experienced the largest decline in house prices during transition. In these cities, home values dropped by 50% in the first decade of racial transition.

A model of house-price dynamics

We developed a simple model to explain how racial transition could lead to a divergence in the price of owned and rented accommodation. Given the prevalence of rental units in black neighbourhoods, market prices would necessarily have been driven by the market for homes as assets (rental units), and so we use a no-arbitrage condition to model the relationship between rents and home values consistent from the perspective of an investor (Kearl 1979). We formalise the capitalisation rate as the percentage of a property’s value that must be received as rent each year to make an investor indifferent between holding the asset and receiving rent, and selling the property at its market value.

Figure 1 shows that the capitalisation rate in black blocks reached 17%, much higher than the rate observed in blocks that remained white. This suggests that investors demanded higher rents to compensate for anticipated declines in the price of their properties during the racial transition. Landlords also provided steep discounts to white renters who stayed on these blocks during the process of transition. The presence of these rental discounts for remaining white families is direct evidence of landlord discrimination.

This the first work of which we are aware showing that segregated housing markets led to both elevated rents and declining home values for black households, but this is consistent with the historical record of the period. Real estate historians have argued that the urban colour line moved when the black families who demanded better quality housing outbid whites to purchase homes in neighbourhoods just outside the established ghetto (Mehlhorn 1998, Troesken and Walsh 2019). In response to these new arrivals, and at least in part compelled by concerns about falling home values and the quality of public services, white households fled transitioning areas (Boustan 2010, Shertzer and Walsh 2019, Derenoncourt 2018). This led to an increase in absentee landlords, as many former residents either rented out their home or sold it to a (white) investor.

The impact of segregation on wealth

Segregation and ghetto expansion left African Americans living in declining neighbourhoods and doubly poorer. Much of the gain in occupational standing and earnings for black families who moved north were cancelled out by losses associated with segregated housing markets. This likely fuelled the link between racial transition and lending risk that was noted by both banks and government agencies in the early 20th century. The effects of this are still felt today.

References

Aaronson, D, D A Hartley, and B Mazumder (2017), The Effects of the 1930s HOLC 'Redlining' Maps, mimeo.

Akbar, P A, S Li, A Shertzer, R P Walsh (2019), "Racial Segregation in Housing Markets and the Erosion of Black Wealth", NBER working paper 25805.

Boustan, L P (2010), "Was postwar suburbanization 'white flight'? Evidence from the black migration", The Quarterly Journal of Economics 125(1): 417-443.

Boustan, L P (2016), Competition in the promised land: Black migrants in northern cities and labor markets, Princeton University Press.

Collins, W J, and M H Wanamaker (2014), "Selection and economic gains in the great migration of African Americans: new evidence from linked census data", American Economic Journal: Applied Economics 6(1): 220-52.

Derenoncourt, E (2018), Can you move to opportunity? Evidence from the Great Migration, mimeo.

Kearl, J R (1979), "Inflation, mortgage, and housing", Journal of Political Economy 87(5, part 1): 1115-1138.

Mehlhorn, D (1998), "A requiem for blockbusting: Law, economics, and race-based real estate speculation", Fordham Law Review 67: 1145.

Shertzer, A, and R P Walsh (2019), "Racial sorting and the emergence of segregation in American cities", Review of Economics and Statistics 101(3): 415-427.

Troesken, W, and R Walsh (2019), "Collective Action, White Flight, and the Origins of Racial Zoning Laws", The Journal of Law, Economics, and Organization 35(2): 289-318.