How the Informal Housing Market Deepens Racial Inequities in Baltimore

Posted March 15, 2021, By the Annie E. Casey Foundation

Blocks of row homes in a Baltimore neighborhood

Buy­ing a home has long been seen as a rite of pas­sage in Amer­i­can cul­ture, a mark­er of eco­nom­ic auton­o­my and secu­ri­ty. But while the com­mon per­cep­tion of the process might involve agents, mort­gage bro­kers and banks, stud­ies show that mil­lions of fam­i­lies across the nation have pur­chased homes through oth­er chan­nels with­out the ben­e­fit of insti­tu­tion­al cred­it. A paper pub­lished in the jour­nal Social Prob­lems — with find­ings from a study fund­ed by the Annie E. Casey Foun­da­tion— sheds light on these infor­mal mar­kets in Bal­ti­more and how they often dis­ad­van­tage buy­ers and exac­er­bate racial inequities.

House of Cards: Infor­mal Hous­ing Mar­kets and Pre­car­i­ous Path­ways to Home­own­er­ship in Bal­ti­more, by Chris­tine Jang-Tret­tien of Princeton’s Cen­ter for Research on Child Well­be­ing, exam­ines where and how infor­mal prop­er­ty trans­fers take place — and explores the con­se­quences of acquir­ing homes out­side the bounds and pro­tec­tions of the for­mal mort­gage market.

An ini­tial analy­sis of pub­lic deed and mort­gage records in Bal­ti­more showed that infor­mal trans­ac­tions are con­cen­trat­ed in the city’s major­i­ty-Black neigh­bor­hoods. The research team at the Johns Hop­kins Pover­ty and Inequal­i­ty Research Lab (PIRL) worked with Prince­ton to con­duct in-depth inter­views with 336 home­own­ers, renters and real estate investors in East and cen­tral Bal­ti­more to drill deep­er into the ben­e­fits and costs of this way of acquir­ing homes.

The paper iden­ti­fies sev­er­al routes to home­own­er­ship out­side the for­mal mort­gage sys­tem: Buy­ers can pur­chase direct­ly from their fam­i­ly mem­bers, their land­lords or out­side real estate investors, or receive prop­er­ty as a gift or inher­i­tance. These sce­nar­ios share a cou­ple of key characteristics:

  1. Trans­ac­tions often take place only between buy­ers and sell­ers, with no inde­pen­dent, third-par­ty over­sight to ensure the inter­ests of both sides are fair­ly represented.
  2. Buy­ers often lack access to vital infor­ma­tion and doc­u­men­ta­tion, such as clear title and full knowl­edge of the con­di­tion and the val­ue of the prop­er­ty, mak­ing it near­ly impos­si­ble for them to make informed deci­sions about the costs and ben­e­fits of home­own­er­ship at the time of purchase.

As a result of these con­di­tions, buy­ers who pur­chase through infor­mal sales are much more like­ly to encounter unwel­come sur­pris­es — rang­ing from years-old liens on the prop­er­ty to nec­es­sary repairs that cost well over what they paid — after they’ve set­tled into their homes. Clear­ing these hur­dles usu­al­ly adds no val­ue to their home; but ignor­ing them can lead to fore­clo­sure or an unin­hab­it­able prop­er­ty. Even those who were giv­en or inher­it­ed their homes were like­ly to end up with unex­pect­ed costs, and more than a third of those who had been giv­en a home did not actu­al­ly hold title to their homes at the time of the interviews.

Despite these risks, infor­mal hous­ing trans­ac­tions serve an impor­tant func­tion. With­out them, low-income fam­i­lies with­out access to for­mal cred­it would be unable to pur­chase even low-val­ue prop­er­ties. And no mat­ter the costs or headaches of home­own­er­ship, most peo­ple the researchers inter­viewed expressed con­fi­dence in the secu­ri­ty of these trans­ac­tions, at least in the short term.

A full appre­ci­a­tion of the role of infor­mal trans­ac­tions, how­ev­er, involves a reck­on­ing with how they evolved in the first place — as an effect of the cred­it dis­crim­i­na­tion, preda­to­ry lend­ing and redlin­ing in pre­dom­i­nant­ly Black com­mu­ni­ties. Racial dis­crim­i­na­tion has pre­vent­ed Black fam­i­lies from buy­ing good homes in safe neigh­bor­hoods and instead worked to seg­re­gate them into areas of con­cen­trat­ed pover­ty. In East Bal­ti­more, the medi­an sales val­ue of homes was approx­i­mate­ly $11,000 — an amount too low for tra­di­tion­al lenders but still high for buy­ers with­out much cash on hand, often lead­ing buy­ers and sell­ers to pur­sue alter­na­tive financ­ing arrangements.

T’Pring West­brook, a senior research asso­ciate at the Foun­da­tion, said the study’s find­ings illu­mi­nate impor­tant con­sid­er­a­tions for devel­op­ing hous­ing poli­cies, espe­cial­ly dur­ing the pan­dem­ic, when many home­own­ers are strug­gling to keep up with pay­ments. Under­stand­ing how infor­mal mar­kets oper­ate is crit­i­cal to get­ting an accu­rate pic­ture of how homes are real­ly bought, sold and financed,” West­brook says. Pol­i­cy­mak­ers must make sure that the solu­tions they devel­op don’t leave some com­mu­ni­ties behind.”

Read more about how fam­i­lies make hous­ing decisions

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