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Who Benefits from Gentrification?

Safeway and other shops in Financial District, San Francisco, California, 2008. | Daniel Hoherd/Flickr/Creative Commons
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From the displacement of Native peoples to the enforcement of Jim Crow, the history of U.S. land policy and practice is a history of inequi¬ties. Gold rush-era Chinese workers and Blacks fleeing Southern racism were barred from California’s housing market and segregated to particular communities. After the Great Depression, the federal government backed mortgage lending as a route to homeownership and wealth accumulation, but redlined minority communities. White flight to suburbia left the urban core starved for investment and government services. Predatory lending and the 2010 foreclosure crisis further depressed rates of homeownership in the inner cities. Today, housing deeds still bear restrictive language such as “no lot in said tract shall at any time be lived upon by a person whose blood is not entirely that of the Caucasian race.” The restrictions have lost their legal standing but their spirit lingers in more nuanced ways.
Ch. 1: Legacy

City Rising is a multimedia documentary program that traces gentrification and displacement through a lens of historical discriminatory laws and practices. Fearing the loss of their community’s soul, residents are gathering into a movement, not just in California, but across the nation as the rights to property, home, community and the city are taking center stage in a local and global debate. Learn more.

When affluent people compete with poor people for a scarce supply of housing, guess what happens? Home prices and rents go up, and the poor are pushed out. In a nutshell, that's the formula that fuels gentrification. 

Most news stories about gentrification focus on symptoms rather than the causes. To put a human face on gentrification, journalists typically report on upper middle-class professional couples looking to buy or rent a home in a city where they can be close to work, public transit and amenities. As more people like them move into the area, commercial rents escalate and new retail businesses — coffee shops, art galleries, clothing stores, gourmet cheese shops, yoga studios and others — replace long-standing local family-owned businesses.

The news stories typically juxtapose those "gentry" with lower income working class families who can no longer afford to live in a neighborhood that they — and perhaps their parents and grandparents — inhabited for decades, even generations. They are pushed out of their communities, displaced from friends, family, neighbors, churches and other social ties. They often wind up living far away, paying much more for rent in a more crowded dwelling, typically a long distance from their jobs, with the emotional scars that come with being displaced persons, like refugees.

A barista Coffee Shop Cafe in Portland Oregon.
A barista Coffee Shop Cafe in Portland Oregon. |  iStock/Getty Images

Because American cities are highly segregated by income as well as race, gentrification also involves clashes of culture. In the typical process of gentrification, the gentry are white, and the displaced victims are people of color. In the first stages of gentrification, neighborhoods become more diverse regarding income and race. But over time, what had been a working class community comprised primarily of Black, Latino and Asian residents becomes an affluent area populated by white professionals, although in some cities, minority professionals are also part of the influx of better-educated and higher-income newcomers. In Los Angeles, for example, affluent Latinos are part of the gentrification of Highland Park, displacing lower-income Latinos, referred to as "gente-fication."

In this human drama, frustration, anger and activism are inevitable. In the Los Angeles immigrant community of Boyle Heights, for example, a community organizing group recently mobilized residents to protest, picket and leaflet in front of newly-opened art galleries and coffee shops, which they viewed as symbols of the hostile takeover of their neighborhood by the gentry. Not surprisingly, the customers in these places were surprised, and angered, by the protests.

In the hyperinflated housing markets of most American cities, even professional couples have a hard time finding an affordable house, condo or apartment. They see themselves as hardworking people only trying to find a place to live, raise their kids and contribute to their new area by shopping at local businesses. Once they settle in, they often join local "neighborhood improvement" groups that lobby local politicians to fix the streets, the schools and nearby playgrounds as well as improve policing and garbage collection. In their minds, they did nothing wrong. But the protesters see them as an invading force.

A Causa Justa :: Just Cause activist demonstrating in the Oakland Homes for All Campaign in 2013. | Right to the City Alliance/Flickr/Creative Commons
A Causa Justa :: Just Cause activist demonstrating in the Oakland Homes for All Campaign in 2013. | Right to the City Alliance/Flickr/Creative Commons

Such anger is understandable but misplaced. The real culprits in the gentrification process are typically invisible or at least not as easily identified as local businesses that cater to upper middle-class consumers. 

Gentrification is not a force of nature, an inevitable economic trend or a preordained social phenomenon. It is the result of decisions made by real people who run institutions, seek to make profits, and are motivated by greed and power. They include insatiable bankers, sleazy mortgage lenders, rapacious developers and landlords, compliant politicians, and indifferent government regulators. But there are also occasional heroes — activists and elected officials — who fight for stronger government oversight of banks, tougher consumer protections and policies that encourage the "revitalization" of neighborhoods but without the displacement of its most vulnerable residents.

The current wave of gentrification has its roots in the 1960s and 1970s, when banks redlined inner city neighborhoods, starving them of credit, refusing mortgage loans to minority consumers, even when families could afford them, and denying loans to homeowners in these areas who wanted to repair their homes. In the 1980s, the Wall Street lobby bribed Congress to loosen regulations on the financial industry, leading to an orgy of speculation and merger mania. Big commercial banks bought up local neighborhood savings-and-loans banks (S&Ls) that had typically provided the mortgages for local homeowners. Instead, the big banks took the savings of local depositors in urban neighborhoods and loaned it out to wealthier suburbs for big homes, shopping malls, golf courses and office parks. Not surprisingly, these older urban neighbors went downhill, a victim of banks' disinvestment. Once stable, neighborhoods became "slums" and "ghettoes." People who could afford to move out did so. So did bank branches, retail stores and municipal government services. None of this was inevitable. It was the result of banks deciding to disinvest from certain neighborhoods – a self-fulfilling prophecy of decline.

In the 1980s and 1990s, the banks reversed course. They sought to "revitalize" the neighborhoods they had previously left behind. Developers began to buy older apartment buildings, brownstones and bungalows, fix them up, convert them to condos or rent them to what the real estate industry and media started to call urban "pioneers" — young professionals eager to "return to the city." Once that trend got started, many local government officials began to jump on the "revitalization" train, using taxpayer dollars to fix the sidewalks, provide more police protection, offer tax breaks to new businesses, rezone neighborhoods to encourage development and "rebrand" neighborhoods with fancy names.

Banks and other financial institutions are the primary causes and beneficiaries of gentrification. They take the money from savings accounts and pensions of working class and middle-class people and speculate in real estate. Anyone who has seen the movie "The Big Short" will understand this dynamic.

Gentrification is not a force of nature, an inevitable economic trend or a preordained social phenomenon. It is the result of decisions made by real people who run institutions, seek to make profits, and are motivated by greed and power.

It was the abuses of Wall Street banks, hedge funds and private equity funds that caused the calamitous financial meltdown and near-Depression in 2006. The financial industry regards local neighborhoods like a casino or a Monopoly board. They view housing as an investment, not shelter. They see apartment buildings, condo complexes and single family homes as opportunities for speculation and profits, essential components of healthy communities. They invest in property, not people.

Raising rents, converting apartments to condos, razing single-family homes and replacing them with McMansions, buying pools of mortgages and selling them to investors, and foreclosing on working class homeowners and reselling the properties to the highest bidders are part of their business model.

Not a single top Wall Street banker who helped bring the nation to the brink of financial collapse went to prison. Government regulations imposed fines on some banks for their abuses – fines paid by the stockholders, not the executives. In fact, many of these Wall Street honchos survived the financial crisis not only with their jobs intact but with substantial raises.   

Many Wall Street honchos survived the financial crisis not only with their jobs intact but with substantial raises. In the past two decades, for example, Wells Fargo — the nation's largest mortgage lender — engaged in widespread abuses of consumers, communities, and employees. Wells Fargo has repeatedly been sued by consumer watchdog groups around the country, as well as by Baltimore and other cities, for violating laws against racist mortgage lending. In 2006, before the subprime bubble burst, Wells Fargo originated or co-issued $74.2 billion worth of subprime loans, making it one of the top subprime lenders in the country. By June 2010, Wells Fargo had $17.5 billion worth of foreclosed homes on its books, making it one of the nation's three top banks in foreclosure activity.

Nurses and Occupy SF protesters in front of Wells Fargo's headquarters in San Francisco's Financial District.  |  Steve Rhodes/Flickr/Creative Commons

Despite getting a $37 billion taxpayer bailout, Wells Fargo resisted before reluctantly agreeing to participate in the federal government's Home Affordable Modification Program. Even so, it helped few of its borrowers who were eligible for loan modifications designed to keep families in their homes. Wells Fargo has been forced to make huge settlement agreements with government agencies for engaging in a variety of predatory practices. In 2010, the Federal Reserve Board levied an $85 million fine on Wells Fargo for steering borrowers inappropriately into subprime loans and falsifying income information on loan applications. This was the largest civil consumer enforcement fine ever imposed by the Fed.

In 2012, in a settlement with the U.S. Department of Justice, Wells Fargo agreed to pay at least $175 million to redress blatant discrimination against African American and Hispanic borrowers. In cities across the country, brokers working with Wells Fargo steered minority borrowers into costlier subprime mortgages with higher fees when white borrowers with similar credit risk profiles received regular loans. Furthermore, while its mortgage lending to white borrowers increased, the bank's lending dropped dramatically for African American and Hispanic borrowers.

Wells Fargo employees holding a free workshop for customers facing mortage payment challenges in Oakland, CA, April 26, 2010. | Justin Sullivan/Getty Images
Wells Fargo employees holding a free workshop for customers facing mortgage payment challenges in Oakland, CA, April 26, 2010. | Justin Sullivan/Getty Images

Wells Fargo has been sued many times for charging abusive mortgage default fees, submitting false and misleading court documents, processing unlawful foreclosures, mortgage appraisal and origination fraud, charging military veterans with hidden and illegal fees, robo-signing of mortgage documents, and other criminal acts. Last year, in another settlement with the Justice Department, Wells Fargo agreed to pay $1.2 billion and admitted responsibility for engaging in mortgage fraud.

Wells Fargo also took a thumping last year from Congress, the media and bank reform activists for boosting its stock price by secretly creating more than two million unauthorized checking and credit-card accounts. The bank's board forced its CEO, John Stumpf, to resign and replaced him with long-time bank insider Tim Sloan. Despite all the scandals, earlier this year Wells Fargo's board of directors awarded Sloan a 17 percent pay increase, to $12.8 million. But the bank is still on the hot seat. In Los Angeles, where Wells Fargo has engaged in aggressive foreclosures while fueling gentrification, community activists are demanding that the local government adopt a Responsible Banking Ordinance which would prohibit the city from doing business with banks that have track records of predatory and abusive practices.

Likewise, JPMorgan Chase CEO Jamie Dimon received a hefty bonus after negotiating a settlement with the feds over his bank's involvement in the mortgage crisis. In 2014, JP Morgan Chase's board gave Dimon a 74 percent raise — to $20 million — despite what was reported as the bank's worst year under Dimon's reign. 

Wells Fargo CEO John Stumpf, center, prepares to testify at a Senate Banking, Housing, and Urban Affairs hearing in Dirksen Building, September 20, 2016, on the company's unauthorized accounts opened under customers' names. | Getty Images
Wells Fargo CEO John Stumpf, center, prepares to testify at a Senate Banking, Housing and Urban Affairs hearing in Dirksen Building, September 20, 2016, on the company's unauthorized accounts opened under customers' names. | Tom Williams/Getty Images​

The Institute for Policy Studies, in a March 2014 report, found that the $26.7 billion in bonuses handed to 165,200 executives by Wall Street banks in 2013 was enough to more than double the pay for all 1,085,000 Americans who work full-time at the current federal minimum wage of $7.25 per hour. This was all part of the widening economic divide that catalyzed the Occupy Wall Street movement that began in 2011.

Nearly a decade after the start of the mortgage meltdown, some of the same corporate and financial actors that precipitated the housing crash have been buying up distressed housing assets in bulk, including delinquent mortgages and vacant houses that are a product of the crash. The biggest absentee landlords in many cities are private equity firms and hedge funds. Blackstone is the largest of these institutional investors, Steve Schwarzman, its CEO, has a net worth of $11.8 billion and in 2015 earned $690 million.  The next largest absentee landlords are American Homes 4 Rent, Fundamental REO, Progress Residential, Starwood Waypoint Residential, American Residential Properties and Silver Bay Realty Trust. These and other hedge funds and private equity firms accumulate most of their housing stock by buying them through foreclosure sales and at auctions of properties by financial institutions, putting on a new coat of paint, and selling them off at huge profits.

Ironically, banks and developers have a stake in the housing shortage, which allows them to force people to engage in bidding wars for homes and apartments. The consumers are at their mercy. The situation is made worse by the widening income divide. Over the past few decades, the earnings of the bottom two-thirds of workers have steadily declined, while the incomes of the richest ten percent have skyrocketed. In many American cities, even middle-class people can't afford to rent an apartment or buy a home without spending half or more of their incomes just to put a roof over their heads.


In Los Angeles, the average rent for a 2-bedroom, 1-bathroom apartment is about $2,169 per month. A family needs to earn nearly $42 per hour — or $86,760 per year — to afford the average rent (meaning, not paying more than 30% of its income on rent). That is more than the typical income of even school teachers, nurses, electricians, mail carriers, insurance appraisers and firefighters. In the same city, the median-priced single-family home sold for approximately $669,000 last year. The monthly mortgage payment required to buy that home is $4,544 per month. A family would need to earn $165,247 per year to support this mortgage, assuming they spend no more than a third of their family income on housing. For janitors, factory workers, Walmart and other retail clerks, Uber drivers, waitresses, day care workers, secretaries and other working class people, rents are out of reach and homeownership is a fading dream. They wind up living in substandard and overcrowded housing, often paying half or even two-thirds of their meager incomes for housing. In the past year, home resales have skyrocketed in L.A.'s gentrifying neighborhoods, including 101% in Boyle Heights, 45% in Crenshaw, 58% in Pico-Union, 19% in Vermont Square and 24% in Watts.

Widening income disparities and rising housing prices are not just confined to Los Angeles and other "hot" cities on the two coasts. These trends are occurring throughout the country. There is no state in the country where a minimum-wage worker working full time can afford an apartment at the fair market rent. Nationwide, in order to afford a modest, two-bedroom apartment, renters need to earn a wage of $19.35 an hour.  This "housing wage" is much higher in some areas. 

Government is supposed to help fill that gap between incomes and housing prices. Politicians often voice concern but do little or nothing. At the federal level, Congress has starved the Department of Housing and Urban Development (HUD) of funding to help poor, and working class families obtain housing. Only one-quarter of all low-income families who are eligible for a housing subsidy — a housing voucher or an apartment in public or other subsidized housing buildings — get it. In America, housing subsidies for the poor are a lottery, not an entitlement. President Trump and his HUD Secretary Ben Carson have pledged to cut HUD’s budget even further, despite the growing need.

It is important to keep in mind that HUD is not the nation's largest housing assistance agency. The biggest slice of federal housing subsidies comes from the Internal Revenue Service — and the beneficiaries are not the poor or working class families. In 2014, the federal government provided $130 billion in tax breaks for homeowners. (This is almost three times the size of the HUD budget). These tax subsidies primarily benefit the wealthiest Americans with the most expensive homes. Take, for example, the mortgage interest deduction. The richest 20 percent of households received 73 percent of these benefits, worth about $50 billion a year. The wealthiest one percent — those with incomes over $327,000 (for one-person households) and over $654,000 (for four-person households) — get 15 percent of the benefits. In stark contrast, low-income homeowners get virtually nothing from the mortgage interest deduction: those with incomes between $10,000 and $20,000 get an average of $294 a year in mortgage interest tax breaks; those earning $20,001 to $30,000 get an average of $447 a year. 

At the local level, most mayors and city council members embrace gentrification, even while giving lip-service to its victims. They encourage the development of luxury apartments and condominiums, either through new construction or the rehabilitation of existing buildings. But, as Los Angeles and other cities have discovered, simply adding more high-end housing doesn’t solve the housing crisis for the bottom two-thirds of the population. When developers add more luxury housing, landlords of existing apartments raise rents. In the housing market, rents and prices "trickle up," they don't "trickle down." Cities could refuse to approve more luxury housing and require developers, instead, to create mixed-income housing — a policy called "inclusionary zoning." Some cities — especially in California and handful of other states — have adopted this mixed-income policy, but typically limit the mix by requiring only 15% of the units be affordable to low-income or working class households, with the rest at market rate. Instead, they could require that one-third of the units be targeted for affluent professionals at market rates, one-third targeted to middle-income income families, and one-third available to low-income workers and their families as well as elderly and disabled people.

Los Angeles' Metro opening ceremony for Foothill Gold Line opening on March 5, 2016. | Metro - Los Angeles/Flickr/Creative Commons
Los Angeles' Metro opening ceremony for Foothill Gold Line opening on March 5, 2016. | Metro - Los Angeles/Flickr/Creative Commons

In Los Angeles, politicians have proudly expanded the city's public transit system, adding new subway stops and bus routes to make it easier for people to stay out of their cars to get to work, reducing traffic congestion, pollution and commuting times. But this hugely expensive public investment makes low income and working class areas more attractive to professionals. Public transit has fueled gentrification. City officials have done nothing to address the gentrification of neighborhoods made more accessible by the new subway.

In recent years, local community groups have begun to fight back. They are asking: "revitalization" for whom? Does “improving” a neighborhood have to come at the expense of long-term working class and low-income residents who are pushed out by skyrocketing rents? There are plenty of public policies that would allow "revitalization" without displacement — rent control, inclusionary zoning, limited-equity cooperatives, “responsible banking” and linked banking laws, community land trusts, and other mechanisms to protect and preserve existing affordable housing — but banking and real estate lobby groups use their political muscle to fight them.

The solution to gentrification is not to demonize professionals moving into working class neighborhoods, to pit the middle class versus the poor, whites versus people of color, or community groups versus the owners and customers of coffee shops, croissant bakeries and art galleries. The solution is to address the root causes — income inequality and the housing shortage — and to focus attention on the banks, landlords, and developers,  who benefit from gentrification and the compliant politicians who take their campaign contributions and do their bidding with friendly policies.

We should also recognize that not all bankers, developers and corporate leaders think alike. Some business leaders understand that a healthy business climate, among other things, is one in which people earn enough to cover basic necessities and some extras, can afford to pay for housing, work in safe conditions and breathe clean air. Government's role is often to use its leverage to ensure that all businesses live up to this responsibility.

In the struggle to balance private profit and public interest, advocates of living wages, more affordable housing and a cleaner environment should have a say in what constitutes a healthy business climate, one in which the nation's — and a city's — economic prosperity is widely shared.

Oakland native Prince and other protesters demonstrating for Occupy Oakland in 2011. | Glenn Halog/Flickr/Creative Commons
Oakland native Prince and other protesters demonstrating for Occupy Oakland in 2011. | Glenn Halog/Flickr/Creative Commons

Top Image: Safeway and other shops in Financial District, San Francisco, California, 2008. | Daniel Hoherd/Flickr/Creative Commons

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