For many years, housing discrimination against African-Americans and other minorities was legal, open, and common throughout the U.S. Racial covenants, openly advertising for white tenants, government policies restricting access to credit for minorities, and threats of violence greatly restricted the housing choices available to minority owners and renters.
Although the Supreme Court declared the most egregious practices unconstitutional many years ago, racial attitudes still play a major role in housing market outcomes.
A recent study by Patrick Bayer, from Duke University, and his coauthors have established convincingly that African-Americans pay higher sales prices than whites for identical units in the same neighborhood. Understanding racial rent differences is even more important since nearly 60 percent of black households are renters.
Our new study, Racial Rent Differences in U.S. Housing Markets: Evidence from the Housing Voucher Program, fills this gap. Using data from rental units in 2000-2002 across all metropolitan areas of the country and the non-metropolitan areas of each state, we estimate racial differences in the rents paid for identical housing in the same neighborhood and show how they vary with neighborhood racial composition.
Our results indicate that households led by African-Americans pay more for identical housing in identical neighborhoods than their white counterparts, and that this rent premium increases as neighborhoods get whiter.
In neighborhoods where whites are less than 30 percent of residents, the premium is between 0.5 and 1 percent. The premium rises to about 3 percent in neighborhoods where whites are more than 60 percent of all residents. Chicago does not fare well in this analysis, showing a higher rent premium than most metropolitan areas. We estimate that African-Americans in Chicago pay a rent premium between 5 and 6 percent in neighborhoods that are 80 percent white, although those estimates are imprecisely measured. Still, for a rental apartment costing $1500 per month, this could mean a racial premium of $900 or more per year for an African-American renter.
We know much more about the extent of discrimination than the causes and our data do not allow us to determine the mechanisms that lead to the racial rent premiums we detect. That said, two explanations fit with our results. Landlords charging different rents based on race almost surely explains some of racial rent premiums, but our primary explanation for racial rent differences is not based on that presumption. It is based on the idea that blacks search less in the whitest areas and hence tend to rent overpriced units in those neighborhoods.
The aversion of some landlords to dealing with African-American tenants and the aversion of some white tenants to African-American neighbors should lead to a sorting of landlords and tenants. Landlords with little or no aversion to dealing with blacks should work in predominantly black areas and landlords with the greatest aversion in predominantly white areas. A similar sorting across neighborhoods will occur for white tenants. Therefore, blacks might reasonably expect to face the most hostility from landlords and neighbors in the whitest neighborhoods. If blacks search less in those neighborhoods based on this assumption, they will typically end up in overpriced units relative to whites. Longer searches for both African-Americans and whites generally result in lower rent prices.
The federal Fair Housing Act was passed in 1968 but we still see racial rent and price premiums half a century later. How effective that Act and the other laws aimed at reducing housing discrimination have been in increasing opportunities for minorities should be better understood.
Since housing is typically the largest cost facing a family, especially for those with low to moderate incomes, the causes of racial rent premiums need to be better understood. Without that, it is difficult to design policies to address this common problem across the US.