Redlining And The Racial Wealth Gap

A redlined map of Los Angeles, California, United States.

African Americans have faced systemic barriers in every facet of American life. When it comes to conversations pertaining to discrimination, the justice system and disparities in healthcare and employment take the forefront. Often missing from these discussions is how unjust housing practices have limited African Americans’ ability to achieve financial success. Since before the term “American Dream” was even coined, there were certain milestones that citizens viewed as the key to upward mobility and, most importantly, generational wealth. Chief among them was homeownership, an avenue that was sabotaged for Black Americans.

From its creation in 1933 to its termination in 1954, the Home Owner’s Loan Corporation (HOLC) was the largest promoter of racial segregation and the originator of redlining. Through redlining, maps were drawn that categorized neighborhoods based on perceived lending risk. However, the “risk” happened to be based on the skin color of residents. “Hazardous” neighborhoods were outlined in red, making it almost impossible for Black citizens to secure the mortgages their white counterparts received through post-Depression reforms. Unfortunately, this imbalance didn’t end when the practice was outlawed in 1968. Instead, the effects have continued to plague Black communities, making it extremely difficult for them to build equity today.

To understand the impacts of redlining, we must first define an appraisal, the base unit of property ownership. An appraisal is a professional process done to determine the value of a property. The prominent force in modern property devaluation is “appraisal bias,” where a property’s value is based on the protected characteristics (race, ethnicity, gender, etc.) of a group or individual. Even though the Fair Housing Act made this discrimination illegal, homes in majority-Black neighborhoods are consistently appraised for 23% less than they would be in non-Black neighborhoods. Homes and cars are the primary sources of collateral—assets that borrowers offer lenders in return for a loan. When a property is undervalued, lenders won’t give as large a loan, effectively minimizing the owner’s borrowing power. This lack of leverage prevents families from accessing Home Equity Lines of Credit (HELOCs) that can be used for education costs, renovations, and other major expenses.

Beyond property values, the consequences of redlining persist through “banking deserts.” Since the HOLC categorized Black neighborhoods as hazardous, the Federal Housing Administration refused to insure mortgages in Black neighborhoods. This, paired with the general racism of bank owners, led to financial institutions leaving towns with a large African American population. As a result, many citizens in these areas were left “unbanked” and highly vulnerable to predatory lenders decades later. While a general bank loan has a below-5% interest rate, predatory lenders often charge upwards of a 100% Annual Percentage Rate (APR). In the 1990s, payday lenders began to instrument a process of reverse redlining. They filled the voids left by banks and exploited Black residents who had little knowledge of finance, trapping them in a vicious cycle of debt and instability.

Similarly to banking access, credit scoring serves as a modern replacement for the HOLC maps. Lenders determine creditworthiness based on data points including debt-to-income ratios and neighborhood property values. Because historical redlining hindered minority families from building the home equity that acts as a way to build credit, many are flagged as higher risk. This leads to risk-based pricing, where lenders offer borrowers higher mortgage rates and interest rates, as well as less favorable terms. According to the Urban Institute, “…the average Black homeowner will pay an additional $13,464 over the life of the loan, which amounts to $67,320 in lost retirement savings for Black households.” This further proves that housing discrimination is not confined to the past.

The most significant financial impact of redlining is the loss of asset appreciation, which is the increase in the value of an asset over time. While it is debated whether a house appreciates or not, there is a general consensus that the land it sits on does. White families who secured mortgages in the 1940s witnessed their homes and land appreciate. This equity was then passed down to the next generation, providing capital for consumer consumption and debt consolidation. Conversely, many Black families missed decades of this appreciation as a consequence of being excluded from the housing market. Hence, more of their income was directed toward debt, leaving less for investments that generate net worth.

A visualization of financial literacy.

Closing the racial wealth gap and ending housing discrimination has not been an easy process thus far. The only way we can begin to dismantle these structures is through a combination of education and legislative accountability. Black Americans have worked tirelessly to achieve the success they have today, but systemic factors like appraisal bias and banking deserts keep many of them from reaching the same financial milestones as their white counterparts. On an individual level, financial literacy is the simplest way to level the playing field. It provides the tools to navigate a complex market where lenders may attempt to take advantage of uninformed consumers.

In 2021, President Biden introduced the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). Though it was dismantled in 2025, this program served as a necessary framework for removing racial barriers in homeownership and making it possible for all ethnic demographics to build generational wealth. There hasn’t been any serious talk of it being reinstated, but it laid the foundation for what accountability should look like. For example, following in PAVE’s footsteps, states like California and New York have implemented their own policies, requiring appraisers to take “Elimination of Bias” courses to keep their licenses. These localized efforts prove that while federal oversight may stall, the standard of fair housing practices remains a demand of the modern economy.