Some Economics of Blockbusting

Blockbusting was made illegal in 1968.

For a couple of decades before that, it worked like this: A real estate company would pick out a predominantly white neighborhood in a city. It would start advertising through the neighborhood that it was “changing,” to use a gentle term, or it would be more explicit that blacks were buying houses in the neighborhood. Some of the white residents would sell their houses and relocate. The real estate firm would sell these houses to blacks, often at a considerable mark-up. White residents in these neighborhoods were apparently unwilling or unable to sell to blacks directly, and thus accepted lower prices for their houses. The process unspooled from there, with the real estate firm increasingly able to play on white bigotry to buy houses cheaply and then to play on limited real estate options for blacks to sell to them at higher prices.

To be clear, “blockbusting” doesn’t just mean that a neighborhood shifted in its racial composition. It’s about how the shift happened. Katherine Bennett, Daniel Hartley, and Jonathan Rose provide some background in “How common was blockbusting in the postwar U.S.?” (Chicago Fed Letter, Federal Reserve Bank of Chicago, July 2022). They searched across “scholarly histories, accounts in the news media, official reviews, and other materials” during the 1950s and 1960s. Remember, blockbusting was not yet illegal for most of this time, so it was often discussed openly. They write: “Ultimately, we have identified 950 specific census tracts across 39 cities that were the sites of purported blockbusting. These tracts represent about 8% of all the census tracts that were not already majority Black by 1950 in these cities. Given the somewhat limited availability of historical records on the subject, this figure could represent an underestimate of the true extent of blockbusting in major U.S. cities during this time period.”

For a concrete example, they focus on the Edmondson Village neighborhood in Baltimore:

In Baltimore, the neighborhood of Edmondson Village, depicted in figure 2, is the site of one of the most notorious instances of blockbusting in American history. Using property-level data, we analyze all of the housing transactions on 2,600 properties in this neighborhood from January 1954 through December 1975. We find that realty companies [more likely to be blockbusters than individual buyers] purchased about two-thirds of all properties, mostly over the period 1955–65. Most of the remaining properties also changed hands, but without involving blockbusters. As a result, comparing the 1950 U.S. Census with the 1970 U.S. Census reveals a stunning amount of population turnover among the original 20,000 residents of this neighborhood, with the Black population share of this neighborhood up from almost 0% to 96%.

Based on the prices of property transactions in this data set, we calculate that when reselling these properties to incoming Black homebuyers, blockbusters charged an average markup of around 45% on home prices—a markup labeled by community groups at the time as the “Black tax.” This markup also reflected the relatively low prices at which the blockbusters purchased the residential properties, possibly due to panic by existing residents. …

To complete these home transactions, blockbusters in Baltimore would often engage in aggressive and sometimes fraudulent practices, many of which became illegal after the passage of the Fair Housing Act of 1968. As an example of an aggressive practice, blockbusters were known to blanket neighborhoods with advertising suggesting that the neighborhood was undergoing a racial transition. … Another set of aggressive practices involved installment contracts, which blockbusters often used to finance the sale of homes, especially for homeowners who could not otherwise obtain mortgage credit. Unlike mortgages, installment contracts allowed a blockbuster to legally retain ownership of the home until a series of payments had been completed by the buyer. Until they paid off their debt, these homebuyers essentially functioned as renters, leaving them vulnerable to the loss of their equity without the protections of mortgage law. As for fraud, two blockbusters were given prison sentences after being convicted of defrauding the Veterans Administration by arranging for false attestations on credit applications by buyers. One result of the financial structure created by blockbusters was a high rate of foreclosure for the new homeowners.