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A Matter Of Equity

Posted by Elwin Green on February 24, 2016 at 2:05 PM

This is a piece about equity - the portion of a home's value that truly belongs to the homeowner as they pay down, or pay off, any mortgages or other encumbrances against it.

It is also about equity, as in fairness, impartiality or the quality of being just.

As I write this, the National Association of Realtors' website lists three houses of similar design for sale in the zip code 15208, which includes Homewood.

They all appear to be in the American Foursquare style, of brick construction, two-and-a-half stories high, with a second-story bay window above the porch. Just like my house.

House A, which sits in Point Breeze, has five bedrooms and two baths, and is listed for $307,000.

House B, around the corner from House A (a one-minute walk, according to Google Maps), has four bedrooms and three baths, and is priced at $414,750.

House C is in Homewood, 1.5 miles away from the first two. It has six bedrooms and two baths.

Its price? $69,900.

The fact that the list price for House C is between 16% and 23% of the list price of similar homes less than two miles away is bad news for the seller. But it gets worse: House C has been listed nearly for a year. That suggests that the market value of House C is even less than $69,900.

I dare not guess how much less.

Some would say that the lower price is to be expected in a neighborhood known to have some of the highest crime rates in the city. But the disparity between home prices in Homewood and those in other neighborhoods predates the increase in crime here. It also typifies a pattern that is common across the U.S. - homes in predominately Black neighborhoods sell for less than similar homes in predominately white neighborhoods.

In a lengthy 2014 piece for The Atlantic, “The Case For Reparations,” columnist Ta-Nehisi Coates explains that the disparity in the value of homes owned by Blacks and homes owned by whites is neither natural nor accidental, but is the continuing result of policies embraced and practices engaged in by developers, financial institutions, and government, up to the federal level. Indeed, the notorious practice of”redlining” began with the Federal Housing Administration, created in 1934. The agency insured private mortgages, resulting in reduced interest rates and down payment requirements. But not for black homebuyers:

“The FHA had adopted a system of maps that rated neighborhoods according to their perceived stabiilty. On the maps, green areas, rated 'A,' indicated 'in demand' neighborhoods that, as one appraiser put it, lacked 'a single foreigner or Negro.' These neighborhoods were considered excellent prospects for insurance. Neighborhoods where black people lived were rated 'D' and were usually considered ineligible for FHA backing. They were colored in red. Neither the percentage of black people living there nor their social class mattered. Black people were viewed as a contagion. Redlining went beyond FHA-backed loans and spread to the entire mortgage industry...”

Eighty years later, the consequences continue to reverberate. One consequence is that the rate of homeownership among blacks stubbornly lags that among whites.

Another is that black homeowners enjoy less equity: homes in black neighborhoods – even middle- and upper-class black neighborhoods – sell for less and appreciate more slowly than homes in comparable white neighborhoods.

To put it simply, homeowners in Homewood and neighborhoods like it have been cheated of equity, for generations. The distribution of equity has lacked equity.

That may not matter to someone whose view of finances is limited to income and expenses, and who is operating in survival mode. But for anyone who wants to build wealth, or to leave a legacy, equity is hugely important.

For most homeowners, the equity in their home is the biggest part of their net worth. It may also be the part that grows fastest: it grows as their mortgage principal shrinks, and grows even more as their home appreciates in value. This equity growth can serve as the cornerstone for wealth building, creating a windfall when the house is either sold or passed on to heirs as part of the homeowner's estate.

Home equity also provides a household safety net that can help families to ride out unanticipated financial bumps in the road.

Finally, for entrepreneurs launching their first business, home equity is the primary source of startup capital.

But when your home's value starts out low, grows slowly, then plateaus or even drops, all of those benefits shrink.

My home was passed down to my wife and me from her father. Her family moved here when she was seven years old (she says the neighbors were mostly Italian then). Her father paid off the mortgage decades ago.

In 2011, I had an idea for an online game. I tapped a home equity line of credit to put $30,000 into the game's development, with the goal of having the game itself generate enough cash to fund further development.

The game didn't succeed, and I let it go fallow because I didn't have any more money to put into it. That $30,000 effectively maxed out the line of credit.

If my house were worth as much as its counterparts in Point Breeze or Squirrel Hill – say, ten times as much as its present value – my home equity line of credit could have funded a second $30,000 round of development. And a third, and a fourth, and a fifth - and I would still have used only half our equity. Maybe multiple iterations would have produced the game I saw in my head. Maybe that game would made lots of money (Farmville, anyone?), maybe not. The point is, with more equity, I would have had more of a shot.

I wonder how many other entrepreneurs in Homewood would have more of a shot at growing their businesses if they had more equity. How much business development is being hindered by the devaluation of Homewood's homes?

I'm working to increase the value of my home, and of my neighbors' homes. I believe that all of us who have invested ourselves in the neighborhood over the past several decades deserve that.

But some of my neighbors may not want that. For some of them, increasing the value of their homes may mean having their taxes go up, without having a corresponding increase in income to pay them. A 60-something widow living on savings, Social Security, and maybe a pension – let's call her Jane Smith - may not care about net worth.

The good news for Ms. Smith is that tax relief is available through the City's Homestead program (Act 50), which can reduce her city real estate tax by $120.90 and her Carnegie Library tax by $3.75; the School District of Pittsburgh's Homestead program (Act 1), which provides a tax savings of $289.76, and the Senior Tax Relief program (Act 77), which for 2015 reduces a property's taxable value to 40% of the full value assessment (for more information, visit the City's website and scroll down to the sections on tax relief).

Homewood is in transition, and one predictable outcome of the change is that property values will increase. When they do, those who already own homes here will finally gain equity, in the financial sense. That's a given.

Will the distribution of that equity be done with equity? That remains to be seen.

Or perhaps it remains for us to decide.


What do you think? Let us know down below!

(For a book-length treatment of this and other economic issues affected by race, see “Black Wealth, White Wealth: A New Perspective on Racial Inequality,” by Melvin L. Oliver and Thomas M. Shapiro.)


A print version of this piece appears in the Feb. 26-Mar. 3 issue of Print, Pittsburgh's East End newspaper. Pick up your copy Friday at Baker's Dairy, 7300 Hamilton Ave., then SUBSCRIBE for more of Homewood Nation and other East End news!

Categories: Economics and Wealthbuilding