How homebuyers of color are held back by a lack of down payment gift money

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According to Freddie Mac, between a fifth and a quarter of all homebuyers receive gift money from relatives to put toward their purchase. Such a windfall can give you a huge head start toward setting up a lifetime of financial security.

But, gifts like these can also be seen as part of ongoing racial disparities in the real estate market. White buyers are more likely than buyers of color to receive down payment assistance from relatives. That makes Black and Hispanic buyers less competitive overall, because they are less likely to come from wealthy families in a position to offer such assistance.

Ultimately, buyers who come from economically challenged backgrounds have a harder time realizing the full financial benefits of homeownership, and they tend to build less housing wealth over time than buyers with more familial money.

Where does this disparity come from?

“Things that happened 100 years ago get passed forward through the system,” said Ed Golding, executive director of the Golub Center for Finance and Policy at MIT’s Sloan School of Management.

Historical discrimination in housing and the mortgage market continues to affect homebuyers of color today, even though it’s no longer legal to discriminate against buyers by race, he says.

“For homebuyers of color,” said Michael Neal, senior research associate at the Urban Institute, “their income and their savings and the kinds of things they might have upfront to put down on a home to purchase, it will be less.”

“The history of discrimination and systemic racism has contributed to those outcomes as well,” he added.

The Urban Institute is a nonpartisan nonprofit focusing on public policy research.

Neal said it’s not just historical policies like redlining that continue to affect homeowners. It’s also real estate agents steering different buyers to certain neighborhoods based on race, even if they’re not doing so consciously. Self-selection plays a part, too.

“White homeowners have preferences for neighborhoods that are white-dominated,” he said. “People of color are typically willing to accept more Black and brown people living in their neighborhoods than whites have shown to do.”

Neighborhoods where the residents are primarily people of color continue to be seen as riskier for investors, which keeps property values down and results in lower returns on investment for homeowners of color.

“Appraisal bias has played a role in limiting or weighing on the values of homes in Black neighborhoods,” Neal said. “Even when they are able to achieve homeownership, the typical Black and Hispanic homeowner has less housing wealth than the typical White homeowner.”

What does this disparity look like?

In a housing market like the one we’re currently in — with tight supply and rising prices — sales can be extremely competitive. It’s great for sellers because they can get top-dollar for their home, but it makes it harder for first-time buyers, especially those with limited outside financial support. Gift money, Neal said, “could be a key source, particularly given the lack of supply.”

The current market conditions coupled with the fact that families of color tend to be less financially well-off means these already-disadvantaged buyers may have even more trouble breaking into the real estate market now.

The Federal Reserve’s most recent consumer finance survey showed White respondents were significantly more likely to be able to receive assistance from friends or family than Black or Hispanic respondents. In 2019, 71.9 percent of Whites said they could receive $3,000 from family or friends, while only 40.9 percent of Black and 57.8 percent of Hispanic respondents said the same. That means it is even less likely for people of color to be able to receive the significant kind of financial support that many first-time homebuyers need toward their down payments.

“Not only are people of color less likely to receive gifts from their family than their white counterparts, they’re also more likely to give financial assistance to their parents,” which can make it even harder for them to save up for a down payment, Neal said.

Even after purchasing a home, buyers of color may still be at a long-term disadvantage for building intergenerational wealth, too, because White workers usually make more money than people of color in their fields.

“Unequal wealth will affect future generations,” Golding said. “Slightly larger down payments in the slightly better school districts make a big difference for the success of the children.”

Neal noted that today’s racial wealth and housing disparities are only likely to become more acute in the years ahead.

“There are signs of a massive transfer of wealth that will happen in the next decade or so,” he said, mostly as a result of aging baby boomers passing inheritances on to their children. “That will make the playing field less level between whites, Hispanics and African Americans.”

How can these disparities be addressed?

Most immediately, homebuyers who aren’t receiving financial support from their relatives should know that there are many down payment assistance programs available through various government agencies and nonprofits.

“There are literally hundreds of down payment assistance programs, many of them run through state and local finance agencies,” Golding said. “Those are policies, state, local and federal policies that push back on this problem of intergenerational wealth and create a path to homeownership.”

But, Neal pointed out, these programs are just a first step. Many of those programs require repayment over time, he said, which makes the funds riskier for their recipients than gift money that never needs to be repaid.

“The cost has to be better aligned,” he said.

“While down payment assistance can help, it’s going to take an effort across many dimensions around homeownership to really reduce that gap,” Neal added. “To take it a step further, we also want to be aware of what are the benefits of homeownership, and how are people of color experiencing those relative to white homeowners.”

The incoming Biden administration has proposed a $15,000 tax credit for first-time homebuyers, which would be immediately applied to their down payment.

Golding said that will definitely give less financially well-off buyers a short-term boost, but addressing systemic economic issues in the housing market will take a more sweeping overhaul.

“When you run a one-time sale, all you’re doing is moving up the demand, you’re not doing anything permanent,” he said. “Part of the problem is risk management in the mortgage industry.”

Golding advocates for changing the way mortgages are priced and how lenders assess risk as a key step to making home financing accessible to more buyers.

“I want us to start to rethink that risk-based pricing is per se a good thing,” he said. “It complicates the process for no real gain in a social welfare sense,” and can prevent underprivileged buyers from breaking into the market.

Bottom line

Even without legalized discrimination like redlining, a legacy of greater financial insecurity for families of color means the housing market continues to favor White buyers with more intergenerational wealth.

Without family financial support, homebuyers of color may struggle to close on their first home and may have to settle for more marginal neighborhoods in their housing search. That perpetuates racial inequality, and although there are programs designed to assist people with their down payments, experts say they do not go far enough to create a completely level playing field for all buyers.

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