Mises Wire

How the Feds Promoted Segregated Housing

Was the New Deal responsible for segregated housing?

The New Deal was filled with legislation that disproportionately hurt minorities such as African Americans. The Wagner Act of 1935, which granted entrenched labor unions major leeway in excluding low-wage workers, allowed these same unions to discriminate against blacks. Additionally, the Davis-Bacon Act was designed to prevent African American construction workers from working on public projects during the Great Depression.

However, one of the least discussed aspects of discriminatory government policy during Franklin Roosevelt’s administration was in housing.

In the article, How FDR Promoted Racial Segregation , Jim Powell detailed some interesting facts about New Deal housing policy. With the Great Depression in full swing, once FDR stepped into office, one of his legislative priorities was to promote home ownership among America’s middle class. FDR established the Home Owners Loan Corporation (HOLC), which spent roughly $3 billion refinancing mortgages for people who failed to make their mortgage payments.

To minimize risks, HOLC would develop more standardized methods for property assessment. According to Powell, “HOLC rated properties and neighborhoods on a descending scale from most desirable to least desirable, and maps were produced to help speed up the process of evaluating mortgage applications.”

The neighborhoods were divided up into four categories:

Neighborhoods were marked as A (green), B (blue), C (yellow) or D (red). An “A” neighborhood was suburban with recent construction, low crime, business and professional people - a white neighborhood. A “D” neighborhood was inner city, old buildings often in need of repair, sometimes high crime - a minority neighborhood. HOLC avoided “D” neighborhoods. This was how official redlining began.

One year after FDR created the HOLC, he established the Federal Housing Administration (FHA). Instead of loaning money or building anything, it provided insurance “that guaranteed to make bankers whole when they wrote mortgages for properties approved of by the FHA.”

Since the probability of mortgage defaults was high, the FHA took a page out of the HOLC’s playbook and crafted policies to minimize risk. Powell explains how the FHA fostered discrimination:

FHA mortgage insurance was originally limited to $20,000, so FHA officials favored “B” housing — modest, single-family homes with comfortable lots in all-white suburban residential neighborhoods where business and professional people lived. In “A” neighborhoods, homes tended to cost more than $20,000, and not many people needed help from the FHA. Officials were concerned about the presence of “inharmonious racial or nationality groups.” Few FHA-insured loans went to blacks. The FHA steered mortgage lending away from cities.

Discriminatory housing policies were a hallmark of the New Deal. Historian Kenneth H. Jackson argued that the “FHA exhorted segregation and enshrined it as public policy” for decades.

The Revival of the Segregated Housing Question

There was relative silence on the discriminatory nature of the New Deal housing policy until Richard Rothstein broke the silence in his book The Color of Law .

In an interview , Rothstein emphasizes that the government was the main catalyst of housing segregation:

“In many cases, the federal government did create...segregation in metropolitan areas and in cities that had never known segregation before. In other cases...it did reinforce segregation that was already in existence. But the country was much, much more segregated as a result of these federal policies than it was before, or would be today without them.”

World War II saw a significant portion of the population uprooted from their homes in order to contribute to the war effort either on the battlefield or in the domestic defense industry. Rothstein highlighted the case of Richmond, California and its segregationist policy:

From 1940 to 1945, the influx of war workers resulted in Richmond’s population exploding from 24,000 to more than 100,000. Richmond’s black population soared from 270 to 14,000….With such rapid population growth, housing could not be put up fast enough. The federal government stepped in with public housing. It was officially and explicitly segregated. Located along railroad tracks and close to the shipbuilding area, federally financed housing for African Americans in Richmond was poorly constructed and intended to be temporary. For white defense workers, government housing was built farther inland, closer to white residential areas, and some of it was sturdily constructed and permanent. Because Richmond had been overwhelmingly white before the war, the federal government’s decision to segregate public housing established segregated living patterns that persist to this day.

Although the South is commonly perceived as the hyper-segregated region of the country, Rothstein uncovered that Northern, liberal Democrats like Hubert Humphrey, who sponsored the Civil Rights Act of 1964, were adamant about maintaining segregated housing. As Rothstein points out in the interview, Northern liberals were actually opposed to any form of housing integration during the amendment process of the Housing Act of 1949:

Republicans in Congress put forward an amendment to Truman’s 1949 Housing Act, requiring that from now on, public housing had to be integrated. No more segregation in public housing. They assumed that conservative republicans would be able to get northern liberal democrats to support this amendment, and the amendment would pass. Then once the housing bill was saddled with an integration amendment, southern democrats would abandon it, and the entire bill would go down to defeat.

Well, the result was that northern liberals campaigned against the integration amendment. They were led by Hubert Humphrey, a civil rights advocate in the Senate, the leading civil rights advocate in the Senate was Paul Douglas of Illinois, and he also led the campaign against the integration amendment. The integration amendment was defeated. The 1949 Housing Act was adopted, preserving segregation in public housing.

Approximately 20 years later, the passage of the Fair Housing Act ended discrimination against African Americans during the home buying process. However, there was one problem — most housing was now unaffordable for both African Americans and working-class whites. Rothstein adds:

By the time the federal government decided finally to allow African Americans into the suburbs, the window of opportunity for an integrated nation had mostly closed. In 1948, for example, Levittown homes sold for about $8,000, or about $75,000 in today’s dollars. Now, properties in Levittown without major remodeling…sell for $350,000 and up. White families who bought those homes in 1948 have gained, over three generations, more than $200,000.

Most American families from the 1940s until the passage of the 1968 Fair Housing Act built their wealth from equity. On the other hand, African Americans were usually renting properties and accumulating no equity or owned less attractive properties. This is arguably one of the reasons why white Americans dwarf African Americans in terms of accumulated wealth .

What Must be Done?

Rothstein’s research has brought new light to segregation in the United States. It’s clear that government policy may have played a larger role in institutionalizing segregation than cultural norms. So what can be done to resolve this problem?

On one hand, completely getting rid of segregation is not very feasible when taking into account that people tend to self-segregate . And there’s nothing wrong with that at all. People should have the right to associate with whomever they please. Numerous ethnic enclaves such as Black Wall Street, Chinatown , and Koreatown have thrived without any need to be forcibly integrated.

Rothstein is no libertarian, and in fact, has actually floated the idea of “federal subsidies for middle-class African-Americans to purchase homes in suburbs.” Frankly, with so much government involvement in housing, adding more subsidies into the mix is simply sub-optimal.

Instead, we need genuine liberalization in housing markets. That means doing away with zoning laws and land-use regulations that restrict housing supply, thus pricing out many potential buyers, especially African Americans.

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