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Homeownership gap calls for broad, balanced response

In remarks delivered at the formal launch of the State of Minnesota Emerging Markets Homeownership Initiative on June 28, 2004, Richard M. Todd summarized some of the key facts about homeownership in Minnesota.

May 1, 2005


Richard M. Todd Former Vice President and Advisor to the CICD
Homeownership gap calls for broad, balanced response

The State of Minnesota's Emerging Markets Homeownership Initiative had its formal launch during a June 28, 2004, ceremony in St. Paul. Federal Reserve Bank of Minneapolis Vice President Richard M. Todd delivered the keynote address at the event. A condensed version of his remarks follows.

My task today is to summarize key facts regarding homeownership rates in Minnesota. My conclusions are only provisional, as I expect to learn more as I share in the analytical work of this initiative.

The basics

The most basic facts concern the gap between the overall rate of homeownership in Minnesota—77 percent, the highest in the country as of 2002—and the rate of homeownership in our emerging market communities, which is just 41 percent, or well below the national emerging markets average of 50 percent. (To be specific, these emerging market figures refer to households not headed by non-Hispanic whites.) We should think of this large gap as only partly a housing issue, because it also reflects broader social gaps and differences, such as income gaps among the communities that make up modern Minnesota. I applaud the organizers of the initiative for recognizing that we need to analyze both the housing and the nonhousing factors behind our homeownership gap in order to develop the broad and balanced responses needed to close it over time.

The emerging markets

There are many ways to think about homeownership gaps, and many differences to look at as we proceed. But the thrust of the Emerging Markets Homeownership Initiative concerns the wide racial and ethnic gaps in homeownership in Minnesota, so that's where I too will focus. In particular, I will present some perspectives on the homeownership gaps affecting Minnesota's African American, Native American, Asian Pacific American, and Hispanic populations, as compared to Minnesota's non-Hispanic white population. These communities, in both their U.S.-born and immigrant portions, have grown much faster than Minnesota's non-Hispanic white community in recent years and are likely to continue to do so in the coming decades. For this reason, and because their rates of homeownership are historically low but recently rising, these are Minnesota's "emerging markets" for homeownership. I rely primarily on Census 2000 to both define and provide the data on these four communities.

Gaps abound as markets grow

Emerging market homeownership rates are generally lower in Minnesota than nationally. Quite the opposite is true in Minnesota's non-Hispanic white community. As a result, the gap in homeownership rates for most groups, as compared to non-Hispanic whites, is high by national standards. Our African American community has the lowest homeownership rate of the major racial/ethnic groups in Minnesota, 32 percent, and the biggest gap, 45 percentage points. This is about double the national gap and second only to North Dakota's. Minnesota's Native American homeownership rate is 49 percent, resulting in a gap of 28 percentage points, also about twice the national gap and the ninth highest among individual states. Only 43 percent of Minnesota's Hispanics are homeowners, leaving a 34 percentage-point gap, or about half again as large as the national gap for Hispanics. Asian Pacific American households in Minnesota are doing a bit better now, with 52 percent owning in 2000, resulting in a 23 percentage-point gap that is not too different from the corresponding gap nationwide.

Clearly, we are already challenged by large emerging market homeownership gaps in Minnesota. These challenges are growing in importance. Between 1990 and 2000, Minnesota's non-Hispanic white population grew by about 6 percent. Over the same period, our African American and Asian Pacific American populations both grew by more than 80 percent, our Hispanic population by 166 percent, and our Native American population by 8 percent for single-race individuals and 57 percent for multirace individuals, based on estimates from our state demographer. As a result, the emerging markets' share of Minnesota's population rose from about 6 percent in 1990 to almost 12 percent in 2000. Immigrants drove much of this growth, as the share of foreign-born individuals in Minnesota's population rose from under 3 percent in 1990 to almost 6 percent in 2000. I think we can agree that our emerging market homeownership gaps are not only wide, but also of growing significance to our state.

Underlying factors

Let me turn now to some of the factors that underlie the gaps, and in particular, some "nonhousing" factors. Our staff at the Federal Reserve Bank began to study these factors after we noticed the steep and encouraging rise in Hmong homeownership in Minnesota in the 1990s. In 1990, Minnesota's Hmong population was much smaller and the Hmong homeownership rate was low—below 20 percent. By 2000, the Hmong population had more than doubled to over 45,000, and the homeownership rate in this expanded population had approximately tripled to over 50 percent.

We are working with the Hmong community to better understand what made this increase possible, partly by analyzing the following factors that researchers consider important for determining homeownership: household wealth and income; age of household head (or, for immigrants, years lived in the U.S.); and other life or family factors, such as whether the householders are married and whether children or extended family members are present.

The Emerging Markets Homeownership Initiative will need to examine factors like these to see what insights they provide into the nature of the housing gaps in Minnesota. The purpose—and let me be clear about this—is not to excuse our gaps, but rather to understand them, so as to develop the broad and balanced responses needed to effectively address them.

My staff and I have conducted a brief initial analysis, looking just at the effects of age and income. We found that families in Minnesota's emerging markets are significantly younger and, not surprisingly, poorer than our non-Hispanic white families. We also looked at what would happen if we somehow made our emerging market families older and more affluent, without changing the rates at which older and more affluent emerging markets families in Minnesota now buy homes. In other words, we calculated, somewhat mechanically, how much the homeownership gaps would close if the underlying gaps in two major nonhousing factors—age and income—disappeared. The results suggest that age and income differences might account for about 40 percent of our emerging market gaps. So, these age and income effects appear important enough to consider more carefully. The other, unexplained portion of the gap is even larger and more deserving of our attention.

We also found that the age- and income-adjusted homeownership gaps are especially large for low-income households. In other words, for households above a certain income threshold—somewhere between $40,000 and $60,000—racial and ethnic homeownership gaps shrink significantly or disappear, depending on exactly which group or age category you look at. However, among low-income households, non-Hispanic whites are much more likely to own homes, compared to almost all other groups and over all age categories.

So, we can think of our task in two parts. First, we need broad social initiatives to ensure that the racial and ethnic makeup of our middle- and upper-income households becomes representative of society. Racial and ethnic homeownership gaps among these more affluent households would then largely disappear. Second, we need additional initiatives to eliminate the legacy of large homeownership gaps between our low-income non-Hispanic white households and our low-income emerging market households. This second set of initiatives would be much more specific to housing markets, especially low-income housing markets.

Communities in focus

Let me give a few more examples of what even a quick look at the data can bring to our attention, focusing first on African Americans, who have the largest gap and are affected by all the factors—age, income, location, etc.—that I will discuss today.

You may know that Minnesota's African American families are typically younger than non-Hispanic white Minnesotans. Forty-one percent of Minnesota's African American heads of household are under 35 years of age, compared to 21 percent of their non-Hispanic white counterparts. And only 12 percent of African American heads of household are over 55 years old, compared to 33 percent for non-Hispanic whites. Since homeownership rates tend to increase with age, these differences matter. You may be less aware that, except for four states with very small African American populations, we have the highest percentage of African American heads of household under age 35. This is one of the reasons our African American gap is higher than its national counterpart.

Partly because it is so young, our African American population's median household income ranks 30th among the 50 states, as compared to our top 10 ranking overall. That puts our African American families at a relative disadvantage in bidding for houses, as indicated by our ranking of 39th in the ratio of African Americans' median household income to median housing value.

Another reason our African American gap is high is that in Minnesota and other Northern states, few African Americans take advantage of the low cost of rural housing. This is in stark contrast to the South, where many African Americans live in rural areas and have rates of homeownership well over 60 percent. I encourage us all to think more about why so many African Americans achieve homeownership in the rural South and so few do in rural Minnesota.

Now, a few words about our immigrant communities. Immigrants clearly emerged as a significant part of our population in the 1990s. The Somali population alone numbers about 25,000, up from a handful of individuals in 1990. Like the Hmong a decade earlier, many of these immigrants arrived as refugees with limited skills and income and, accordingly, their homeownership rates are still low. As we have seen with the Hmong, it can take a group 10 years or more after arrival before homeownership becomes widespread, and full convergence with non-Hispanic white rates may take decades. To foster homebuying in our Somali community, we will need creative approaches to devise sound housing finance vehicles that respect Islamic beliefs concerning the receipt and payment of interest.

Points to consider

I now turn to some of the more direct, housing-related factors that could affect our emerging market gaps, especially among low-income households. Some points I think we need to consider:

Discrimination is not dead, and we need to maintain regulatory and legal countermeasures.

Supply-side factors matter. Notably, zoning and land-use regulations can unduly inflate the cost of housing. The recent, rapid rise in house prices in the Twin Cities and other areas, combined with the growing need for affordable starter homes, suggests we should examine whether coordinated regulatory changes, especially across the Twin Cities metro area, are needed.

We need to build trust between emerging market individuals and our responsible financial institutions through initiatives like financial education, homebuyer counseling and efforts to hire more emerging market individuals into the financial and housing sector.

We need to consider what it takes for new homebuyers to sustain homeownership. Minnesota has some nationally recognized leaders in the areas of foreclosure prevention counseling. Our staff at the Federal Reserve Bank is involved in researching how foreclosure records might be used to assist homeownership preservation initiatives.

Homeownership is not for everyone. In other words: Don't forget the rental market. It is vital to this initiative, for several reasons. For one thing, many households need a few years to save for a down payment, and the availability of decent, affordable rental housing greatly facilitates that process.

We need to sustain private sector innovations that have reduced discrimination and made credit more widely available, such as automated underwriting and appropriate risk-based pricing, while seeking targeted means to weed out those who abuse these innovations. We also need good cooperation at the federal level. One example is to work with the Bureau of Indian Affairs on efficient processing of mortgages and title changes on Indian trust lands.

Economics and Education

In closing, let me return to the nonhousing factors that were my primary focus, to briefly suggest how to address them. Some cultural differences with implications for homeownership, such as the preferred age at which to marry, may endure and simply be accepted. But many nonhousing factors reflect economic differences related to income and wealth. Here we seek to eliminate differences, at least in opportunity. By far, our most important tool will be to equalize access to education.

In that regard, recent research from two of my Minneapolis Fed colleagues has stressed the key role that investments in early childhood development can play in closing educational gaps.* This is an example of the broad and balanced effort needed to eliminate our homeownership gaps. We must consider not only housing initiatives, but also initiatives that address the broad economic factors at work. On that note, I look forward to working with all of you to develop a broad and balanced response to Minnesota's emerging market homeownership gaps. Thank you.

*Todd refers to a collection of articles and other materials by Art Rolnick, Senior Vice President and Director of Research; and Rob Grunewald, Regional Economic Analyst. The materials are posted on the Minneapolis Fed's Early Childhood Development Web page.