Have you ever sat down and asked yourself… why is there a “good” part of town, a “bad” part of town, and how this plays into your ability to earn wealth?
Preface: This post is a little unconventional and subtle from some of my other personal finance articles. It highlights a history of wealth distribution in our country and I wrote it with the intent to challenge your views and evaluate your own perspective of money in your life and community from a different angle. If you’re looking for some of my more blatant personal finance advice, click HERE.
In 2017, HGTV (Home & Garden Television, headquartered right here in Knoxville) purchased an 1,800 square foot home that was built in 1925 in a neighborhood right outside the downtown area of my city, cleaned it up, valued it at $465,000 and gave it away.
The the winner did not live in Knoxville, nor did they live in Tennessee. They didn’t live in the Eastern Standard time zone or anywhere near it. The winner lived in Oregon. She took the cash payout, and the home went on the market…where it sold quickly.
A decade ago, similar homes in that area sold for $30,000 to $110,000…depending on size and condition. Today, the HGTV home’s value of $465,000 was the fair market value.
Let’s shed some reality on this. According to the FHA (Federal Housing Administration) at the time of this article, if you want to get a mortgage for a loan amount under $494,100… you’re fine. Anything above $494,100 is considered a “jumbo loan” and triggers a litany of underwriting guidelines, borrower requirements, and necessary qualifications.
This house is valued at $29,000 under what our government considers a “jumbo mortgage”.
For reference to those readers outside Knoxville… here is a home that is listed for sale, right now, in the suburban area of Knoxville for $475,000. It’s double the size with double the bedrooms/bathrooms, and four times the yard space.
So, how is a neighborhood where homes are half the size, with half the usable space, that were previously located in the “rough” part of town… suddenly so valuable?
Let’s take a trip in the metaphorical time machine to the year 1924.
White families had been owning/inheriting land and building wealth by the use/ownership of slaves in America for generations. Black Americans were, at best, a generation removed from being those slaves. To emphasize my point, your 1924 black citizen’s parents or grandparents were likely once considered “legal property”. That translates to mom and dad had virtually zero means to give you a competitive source of education, opportunity, nor the ability pass down any wealth or land. They never received it for themselves, so how could they ever provide it for you?
Even though black Americans were no longer considered “property” and were free, they were federally barred from numerous opportunities… specifically, owning real estate.
In 1924, the construction crew finished the home that would eventually become the HGTV home, and presumably, the first family moved in. Here’s some things that happened in the coming years after our HGTV house was built.
1934: The year of redlining.
When the owners of the HGTV house celebrated its 10 year construction anniversary, the National Housing Act of 1934 became law. This legitimized the practice of mortgage discrimination. The newly formed FHA allowed lenders to create “residential security maps” that outlined areas with a red marker (called “redlining”) that were deemed high-risk areas to extend loans to, and gave banks the power to deny all mortgage loans to anyone who lived inside those areas.
Many minority neighborhoods were redlined (separate but equal, remember) which meant that these neighborhoods decayed due to the inhabitant’s lack of wealth and the inability to access loans for buying or making repairs on any homes. This made those neighborhoods very unattractive locations for new or existing families to live.
Can you blame them, though? I’m not justifying the behavior, but what would you do? I own two homes, neither of which were paid for in cash. If my bank forbid me from getting a loan in certain areas, what other options do I have?
1944: The war is over, and my parents are about to be born.
The HGTV home’s original roof probably still had a few years left on it when the GI Bill at the end of World War II furthered segregation practices by excluding black Americans and minorities from white American neighborhoods.
When millions of soldiers returned home from World War II, they took advantage of the of the GI Bill which gave veterans education and training opportunities, guaranteed loans for home, farm, or business, job finding assistance, and unemployment pay for up to one year if a veteran could not find a job.
This law allowed millions of U.S. soldiers to purchase their first homes with inexpensive mortgages, which meant the huge growth of suburbs and the birth of the “ideal” of a suburban lifestyle. Remember, “redlining” is still law, so these inexpensive mortgages were being extended to other communities.
To add insult to injury, Black and minority families of 1944 were met with discrimination when trying to purchase a home in the overwhelmingly white, non-redlined neighborhoods. The realtors would not show these houses to black or minority families, and when they did, they would try and talk them out of buying it. This discrimination was based on the fact that realtors believed they would be losing future business by dealing or listing with black or minority families, and that it would be unethical to sell a house in a white American neighborhood to a black or minority family because it would drive the property values of the surrounding houses down.
Redlining from 1934 and the GI Bill in 1944 forced most black or minority families to a concentrated area within a city where property values were declining rapidly.
1968: The year that Dr Martin Luther King Jr was assassinated.
By this point, our soon-to-be HGTV home was 44 years old. Discriminatory practices of redlining had been occurring for four decades by the time the Fair Housing Act was passed. After this act was passed, discrimination on the basis of race, color, religion, sex, or national origin was prohibited in the rental, sale, financing, and brokerage of housing or housing services.
By then, the damage was done. The majority of white families lived in the affluent suburbs, and the majority of black or minority families lived in the decaying inner cities.
Story time. The house that I bought in 2013 has appreciated in value by $40,000 from 2013 to 2018. Meaning, if I published this blog post right now and sold my house in ten minutes, I would walk away with forty grand in my pocket. If I became $40k wealthier in 5 years, can you imagine how much wealth I would miss out on accumulating over FIFTY years?
The 1970’s: Nixon, Watergate, Vietnam. More discrimination.
In 1971, the HGTV home is finally four years older than the home that I currently live in.
In this year, President Richard Nixon declared that federal law requires nondiscriminatory practices in federal housing matters, but did not provide presidential support. He declared that government could not force suburban desegregation or economic/racial integration. In doing so, he exacerbated the issue of housing inequality by not supporting subsidized housing programs to help desegregation.
In 1974, the Equal Credit Opportunity Act stated that creditors could not discriminate against applicants based on race, sex, marital status, religion, ethnicity or age. The following year, the Home Mortgage Disclosure Act was passed that protected applicants from discrimination through lending institutions by requiring that any financial institution providing federally related mortgages to disclose reports of their lending activities to prevent lending discrimination in certain localities.
The Community Reinvestment Act of 1977 was passed that banks to apply the same anti-discriminatory guidelines to their lending criteria in all circumstances. This did not stop discrimination, but rather moved them to more subtle techniques, including racial steering (suggesting that black or minority families should buy a home where black/minority families already live…kind of like redlining, amirite?) and misinformation given to black/minority prospective buyers.
It’s mentally kind of fun to realize that I live in a house that was built in the year 1975, which was also around the time that our government was trying to lay the foundation that would eventually allow me, a half-black American, to buy this house 40+ years later. However, that means that a minority family of yesteryear had a systematically near-zero chance of buying my suburban house when it was brand new, because of the decades of systematic segregation that had been occurring. But hey, we’re here, right? Things were improving, the war was over, and minority families were no longer being forced into the blighted communities, right? Well…
The term “white flight” describes the time period when white Americans fled the inner cities in exchange for suburban neighborhoods where minorities were forbidden from buying (by law or lack of wealth). Here’s a graphic to explain what happened:
The Modern Suburb.
We’ve seen the documentation of the bus boycotts, sit ins, and black people being sprayed by hoses. In this post, I didn’t even get into any of those moments, nor the education, employment, or judicial discrimination. I am only covering housing discrimination and how that lead to an absence of wealth.
As a lifelong real estate nerd, one of my favorite games to play is this: What was life like when this neighborhood was built?
Look around your city and identify the oldest suburban neighborhoods. When were they built?
West Knoxville, Tennessee: 1959
West Knoxville, Tennessee: 1969
Over the span of 10 years, look at all the development that occurred in this single snapshot of a formerly rural area of the city, about 10 miles west of the HGTV house.
In the years 1959 through 1969, de-segregation was occurring in our country. White families and property owners were fleeing the inner cities for “sub-urban” developments and they took their generations of wealth/tax revenue with them. These new suburban areas ended up needing new schools to be built, infrastructure such as interstates to be developed (fun fact: the interstate system became a thing in 1956*), and civil services such as crime prevention fully funded.
*Side tangent. Ever wonder why you see those rural pop-up towns off state highways, but miles removed from the interstate? Have you asked yourself why people live there? That’s because the town existed before the interstate on what formerly was the only path between cities. When President Dwight D. Eisenhower signed the Federal-Aid Highway Act of 1956, traffic/consumers were diverted around those towns. People relocated, businesses shut down, and certain rural areas became isolated again.
When the suburbs became popular, the HGTV house was left behind in a neighborhood that fell into disrepair as property values bottomed out and tax revenue evaporated. Since minorities lacked wealth, they inhabited these low cost homes and inherited the expensive upkeep of an aging house, alongside vanishing civil services and education.
If you didn’t know, your public schools are funded by local property tax revenue.
If a home is worth less, its property taxes are lower, and the community schools subsequently receive less funding. When a community’s schools deteriorate, the citizens become less educated and their income earning potential is diminished. When one cannot earn much money, they become desperate. Desperate people commit crimes to survive. There is no tax revenue to pay for the added crime prevention. Do you see what I’m getting at?
That’s how the “bad part” of town was born.
Fast forward to 2018.
Did you know that there is modern-day housing discrimination?
- Jan 2018: JPMorgan pays $55M to settle mortgage discrimination lawsuit
- Feb 2018: Wells Fargo accused of preying on black and Latino homebuyers in California
- July 2018: Suffolk Federal Credit Union settles lending discrimination suit
True story, man.
So, let’s conclude this post. How did our HGTV home go from a brand new pre-war home, to witnessing the assassination of Dr Martin Luther King Jr., and become a victim of a destabilizing neighborhood…to eventually being worth almost half a million dollars?
Gentrification is , by definition, the process of renovating and improving a house or district so that it conforms to middle-class taste.
People realized that there was cheap housing close to downtown areas, which were already being revitalized by city initiatives. Homeowners and investors started buying up these properties, renovating them, and selling them for a profit–or living in them and enjoying their new found property values.
Gentrification is championed for attracting new businesses to an area, creating affluence, increasing tax revenues in depressed economies, and funding city services such as police protection and education.
Gentrification is shamed for making low income housing become un-affordable, increasing rental rates, and displacing the poorest families who may not have any resources to relocate.
I will leave that debate up to you.
There are only so many 1920’s era homes that exist. The desire for access to downtown services such as public transportation and boutique shopping rather than big-box stores of the suburbs have lead to the revitalization of forgotten communities of the 1960’s. The homes that made it to present day, such as our HGTV home, are becoming fashionable and highly desired. Anyone can build a new home, but only the older places can capture the charm and character that it was originally built with.
People are willing to pay a hefty price for that appeal.
This phenomenon isn’t exclusive to my city. Everything that I mentioned from the 1920’s through 2018 happened nationwide in every neighborhood. Most cities are seeing revitalization, while others are still dealing with depressed social situations that are decades, generations, and numerous Presidential administrations in the making.
For decades, we have been told that real estate is one of the major players in one’s ability to build substantial lifetime wealth. There are hundreds of seminars, books, videos, infomercials, movies, and television interviews that discuss how to build wealth using real estate. Our current President is a prime example of somebody who used real estate to become rich.
However, if I can leave you with one thought, it’s this: It hasn’t been allowed to work for everyone.
Challenge your thinking. While we all try to build wealth in our own lives, let’s not mistake the realities that we’ve been hand delivered by the generations that came before us. We are inheriting this world with all its faults, and it’s our duty to make sure we make this place a better world for all of those who come after us.
Some people are the first member of their family to stand on their own feet financially. Others are correcting their own money mistakes and joining their relatives in general comfort. Ultimately, we all start our journey from different origins, and complete them at different destinations.
Personal finance is personal. Everyone’s experience is different.
Find your path to financial freedom, and move forward at your own pace. Don’t spend your time comparing your success to others around you, because they likely started on a different playing field than you with different challenges to overcome.
Before I go, here is the link to the before/after photos of the HGTV house that I’ve been referencing through this entire post, here in Knoxville.
Pic credit: archinect; hgtv; hookedonhouses; realtor; the atlantic; the peoples history; public domain