Black Homeownership and The Racial Wealth Divide

For most Americans, homeownership is the greatest wealth-building asset yet the access and ability to own a home is not equal. Disparate rates of wealth and homeownership are symbiotic issues that persist under America’s racial wealth divide. Lease-to-own models are being explored as a means to help aspiring homeowners, particularly those with low wealth and moderate income, purchase a home.  Using 2019 Consumer Survey of Finance data, it is estimated that median Black household wealth is at $24,100, while median White household wealth is $188,200. The increase in wealth provided by homeownership is an important step to bridging the racial wealth divide. Even with only a minority of African Americans as homeowners, homeownership is central to Black household’s assets, comprising 49% of their wealth portfolio.^[1] It has been estimated that increasing Black homeownership rates to that of White Americans would more than 4X increase the median wealth (not including depreciating assets) of Black Americans.^[2]

Black homeownership rates have steadily remained in the low to mid 40% range since 1960.^[3] Black homeownership currently stands at just 45%, compared with White homeownership at 72%.^[4] The significant gap between Black and White homeownership rates has been pervasive throughout history. For instance, in 1940, Black homeownership was nearly half that of White homeownership. While homeownership rates for African Americans have more than doubled since 1940 – from 23% to roughly 45% – White households have experienced a growth in homeownership as well, from 45.6% to 72.4%. This coinciding growth in homeownership contributes to a centuries-long homeownership gap. Growth in African American homeownership has yet to narrow this gap. Since 2004, Black homebuyers have accounted for around 5% – 7% of home purchase mortgages, whereas the Black population makes up 13.4% of the U.S. population.^[5]

Landis and the Lease-to-Own Model of Homeownership

Lease-to-own programs allow future homeowners to rent out a home for a specific amount of time with the intent of purchasing at the end of the lease. Nonprofit and government entities have historically deployed these programs as a means to increase homeownership in their local communities. Landis is a new private company seeking to scale the lease-to-own model to U.S. markets that are most in need of strengthening homeownership and wealth building.

Landis’s public goal is to design a lease-to-own model that increases homeownership for populations that have low homeownership rates like African Americans. However, there is a history of lease-to-own models that exploit the American dream of homeownership and simply mask high rents with false promises of ownership. Predatory lease-to-own models have been part of a long history of wealth stripping in historically marginalized communities. Exploitative models transfer maintenance, taxes and repair responsibilities to tenants. Despite the reality that there are predatory lease-to-own programs, it is also true that a well constructed lease-to-own model could strengthen homeownership for lower-income, low-wealth households. This brief review of the basics of the Landis lease-to-own program highlights what is promising about it and what further information is needed to ascertain whether this has the potential to be a net positive for homeownership, particularly for African Americans.

Landis’s lease-to-own program has a three-step process. The company helps clients select their home, buys the property while the client rents it, and the client purchases it with a mortgage after a 12-month period. Within this 12-month period, Landis assists clients by devoting a portion of their monthly rent towards their down payment. Landis also creates a tailored plan to improve their clients’ credit scores and savings, as well as, provides one-on-one coaching. Landis promotes their model as one where the economic incentive for their company is homeownership, where they make more money when the tenant purchases the home versus staying a tenant.

When prospective buyers fill out an application, Landis forecasts whether or not the applicant will be able to obtain a mortgage within 12 months. Qualified applicants can choose any active home on the market within their given budget. Landis purchases the property, allowing the applicant to rent the property. The rental period is a time to build credit and contribute to their down payment. Landis will help the client get a mortgage, and the client is able to purchase the home from Landis, typically within 12 months. Landis’s homeownership program is designed to serve low- and moderate-income households who could likely qualify for a mortgage in the future, but could use assistance today in strengthening their credit score and building up a down payment to be in a more financially secure position.

Promising Practices for Landis to Increase Black Homeownership

There are several signs that Landis’s homeownership model could be particularly helpful in addressing the low African American homeownership rate. First, the average personal client income for the Landis program is $44,000, substantively lower than $67,000, the average personal income of new homeowners. Second, Landis’s credit score minimum of 550 is much more inclusive than conventional mortgages. Conventional mortgages typically have a credit score minimum of 620 – 700. More than 50% of White Americans have a credit score above 700; among African Americans, it’s 20%. What has more potential to increase Black homeownership is the 33% of African Americans who have a score below 620.^[6] African Americans with an improvable credit score, such as those with a score near 620, and fair income around $45,000 – $50,000 could become mortgage-ready with the assistance of credit repair, financial counseling and down payment assistance.

Landis works with qualified partners and experts in the field. An example includes working alongside HUD-certified housing counselors through the client’s entire home buying life cycle. Furthermore, both loans and properties sold through Landis are FHA-compliant. Landis also requires, and assists with paying for, an independent home inspection and third-party appraisal to ensure properties do not have hidden issues requiring burdensome, expensive repairs. Finally, Landis also implements a standards contract for its homes, a common legal practice.^[7]

Landis’s model also uses a non-traditional approach to understand an applicant’s financial background. Rather than solely basing their pre-qualification process on traditional qualifications such as FICO 2, 4 and 5 scores, which are older credit reporting standards required by Fannie Mae and Freddie Mac, Landis uses proprietary data science methods to analyze various sets of data that provides further insights to a prospective homeowner. This is done through reviewing full financial, credit, income and housing history. Additionally, Landis’s program is structured to help clients build credit and save enough money to use towards their “down payment fund” within the 12 months of renting. Landis’s “down payment fund,” which receives a portion of the client’s monthly rent, helps their clients build a stronger financial profile with larger savings accompanied with credit repair. As mentioned previously, African Americans have less income and wealth available to save for a down payment. Furthermore, White and higher-income applicants are more likely to receive family assistance, inheritance or business revenue/equity to contribute to their down payment. Due to lower income and wealth levels, African Americans begin their homeownership with little of the starting capital needed to best assist in attaining the goal of homeownership. Landis’s program of charging rent that assists in building up a down payment is the type of innovation that could be helpful to Black homeownership.

Landis’s geographic presence lends itself to supporting an increase in Black homeownership as well. Landis is operating in many Southern states, such as Alabama, Georgia, South Carolina and North Carolina; as well as midwestern states such as Ohio, Pennsylvania, Indiana, Kentucky, West Virginia and Maryland. This geographic presence in southern and midwestern states is imperative to increasing Black homeownership rates. These states have low- and moderate-income Black populations who have the potential to be mortgage-ready with a little bit of assistance, such as the assistance provided by Landis. Furthermore, Landis’s presence in these areas has the potential to aid in preserving much-needed affordable housing for low-wealth people and people of color. Affordable housing across the country is becoming less and less available, as gentrification and its effects on housing prices are of particular concern to Landis’s target clients.

What More Can Landis Do?

Landis shows potential in advancing Black homeownership; however, the few hundred clients that have come through Landis due to the company’s limited tenure – the company started operating in 2019 – makes it a challenge to see if this model for homeownership will significantly change Black homeownership rates nationally. As of May 2021, Landis is ramping up the number of households it has turned into homeowners, which allows for a more thorough evaluation of its potential in increasing Black homeownership rates moving forward. A paper by the Terner Center for Housing Innovation at the University of California, Berkeley argues the lease-purchase model “has the potential to overcome the income, credit and down payment constraints many households face in buying their first home.”^[8] Hopefully, Landis will develop into a national experiment to see if through technological innovation and social impact, there can be advances in this area of inequality that haven’t been seen in decades.

In order to significantly help remedy the national crisis of low homeownership plaguing the Black community, it is important that Landis openly shares its data concerning both its success and challenges in transforming renters with lower levels of wealth into homeowners. For participants that opt into anonymous aggregation of data regarding their starting points and progress, Landis can report the economic progress of their participants by race and ethnicity over time. Landis may also track rent rates, credit profiles and mortgage interest rates offered to Black and minority participants, and compare them with White participants to examine differences in lending patterns across racial lines. Collecting and comparing data on housing practices and rates can lead to a better understanding of the socioeconomic discrepancies between Black, other people of color and White homebuyers. Data collection and patterns can also provide insight as to how the Landis model may or may not be adequately serving target minority clients. For example, if data collected about Landis clients’ program success rates and financial wellbeing after completion of the Landis program illustrates unequal returns according to race, income levels or geographic locations, this collected data can inform Landis on what improvements are needed to better serve target clients. Consequently, an understanding of lending and financial disparities can lead to other possible best practices to bridge the homeownership gap.

Long-term data collection, especially beyond completion of the Landis program, is necessary to paint a holistic picture of Landis’s impacts on homeownership and wealth development. The need for long-term data collection is an opportunity for partnerships between local community development or economic empowerment organizations. These organizations can collect necessary information about the financial wellbeing of lease-to-own homeowners long after they complete the Landis program. We recommend that as part of the Landis program, participants who buy a home partner with local economic empowerment organizations who can provide long-term financial counseling, including guidance as to available resources that can assist Landis participants throughout the entire homeownership life cycle. These organizations can also collect information about former Landis participants’ financial wellbeing that can be used to strengthen programmatic support for wealth building over the long term.

A successful Landis program that serves the African American community well also has the opportunity to connect African American clients to mortgage lenders, agents and realtors that need to strengthen their services to the Black community. Landis can also increase their reach and impact in the African American community by partnering with real estate brokerages and agents who are already predominantly serving this community. Partner mortgage lenders and agents can also leverage the relationship with Landis to create more first-time Black homebuyers and future clients by referring denied mortgage applicants to the Landis program. Applicants who may have been unqualified for traditional mortgages might be qualified to become homeowners in the future, through credit improvement and down payment savings assistance, such as provided by Landis.

Landis can further advance their commitment to racial economic equity by supporting and advocating for greater regulation around lease-to-own agreements, a largely unregulated industry which has allowed for many predatory practices and designs. Finally, Landis can become a voice of support for expansion of the Home Mortgage Disclosure Act to include data collection and reporting about lease-to-own purchases, as a way of monitoring this emerging market.

^[1] https://www.pewresearch.org/fact-tank/2013/08/30/black-incomes-are-up-but-wealth-isnt/

^[2] https://www.demos.org/research/racial-wealth-gap-why-policy-matters#How-Homeownership-Contributes-to-the-Racial-Wealth-Gap

^[3]https://www.urban.org/research/publication/explaining-black-white-homeownership-gap-closer-look-disparities-across-local-markets/view/full_report

^[4] https://www.census.gov/housing/hvs/files/currenthvspress.pdf

^[5]  https://www.census.gov/quickfacts/fact/table/US/PST045219

^[6] https://www.urban.org/sites/default/files/publication/101160/explaining_the_black-white_homeownership_gap_a_closer_look_at_disparities_across_local_markets_0.pdf p.8

^[7] https://www.nclc.org/images/pdf/pr-reports/report-land-contracts.pdf p. 10

^[8] http://ternercenter.berkeley.edu/uploads/lease-purchase.pdf