First and foremost, blockbusting, also sometimes referred to as "panic selling," is a discriminatory and illegal real estate practice. It involves convincing property owners to sell their homes based on the assumption that a new neighbor will change the socio-economic makeup of the neighborhood. However, while it may be outlawed, similar discrimination still exists today. With that in mind, read on below to learn more about blockbusting and what you can do as a real estate investor to stop it in its tracks.
What is blockbusting in real estate?
In real estate, blockbusting occurs when a real estate broker convinces a homeowner to sell their home for a lower price based on the assumption that the neighborhood's socio-economic makeup is about to change and that property values will soon decrease. At its core, it's one of the most discriminatory real estate practices and, thankfully, it is illegal in today's industry.
The definition of blockbusting can be a little hard to wrap your head around. Consider the following example: When a black person moves into a white neighborhood, a real estate agent starts telling white homeowners that it is a sign of racial change. As a result, the white homeowners start panic selling. Then, the same real estate agent turns around and sells the available listing to a black buyer at an inflated property value.
We chose that example because, typically, racial minorities have been the ones most targeted by this form of housing discrimination. In the past, this practice, along with redlining, was a major contributing factor to continued segregation after the passage of the Civil Rights Act. Unfortunately, we are still dealing with the effects of these practices today,and it is still difficult for many racial minorities to gain access to affordable housing.
Blockbusting from a historical perspective
While the example above may seem a little bit over the top at first, it's crucial to realize that blockbusting was a fairly common practice in the not-too-distant past. In fact, the phenomenon of panic selling when a buyer of a different race or national origin moved into the neighborhood was so common that it became known as "white flight."
In addition, many neighborhoods also used restrictive covenants to keep minority buyers out. A restrictive covenant is a private agreement between homeowners to agree to avoid selling their homes to members of a particular race. Since these were private agreements, they could not be outlawed the same way other discriminatory practices could be. However, rather than being outlawed, they were often suggested as a solution. Believe it or not, until 1934, the restrictive covenant was a key feature of the Federal Housing Administration's underwriting manual.
Together, white flight and the restrictive covenant also worked alongside the practice of steering to promote segregation. In real estate, steering occurs when an agent directs members of a particular race towards certain neighborhoods or away from others.
This racial fear ran so deep that, in 1924, the code of ethics for the National Association of Real Estate Boards (the predecessor to the National Association of Realtors) actually read, "A REALTOR® should never be instrumental in introducing into a neighborhood a character of property or occupancy, members of any race or nationality, or any individuals whose presence will clearly be detrimental to property values in that neighborhood."
Legislative action to prevent blockbusting
Fortunately, since then, there have been quite a few pieces of legislation passed to prevent blockbusting and other discriminatory real estate practices. In particular, in 1948, the Supreme Court ruled in the Shelley v. Kraemer case that racially restrictive covenants were unenforceable in court. Then, with the passage of the Civil Rights Act in 1964 came Title VIII, which is also known as the Federal Fair Housing Act.
Once the Fair Housing Act was signed into law, it prohibited discrimination in the sale, rental, or financing of housing. Historically, the act prevented discrimination on the basis of race, religion, national origin, or sex. However, recently, President Biden signed an executive order to extend protections under the act to include members of the LGBTQ community.
What real estate investors need to know about blockbusting
Thanks to those protections, blockbusting in the traditional sense has largely fallen by the wayside. However, though we now have integrated neighborhoods in some areas of the country, discrimination still exists. Often, it shows up in the form of uninvited solicitations about a particular piece of real property or neighborhood or unchecked assumptions about a particular individual.
For example, a real estate broker may say something derogatory about the quality of a school district in a particular area or may recommend certain properties to a client because of an assumption about their familial status. By the same token, a landlord may make assumptions about a potential tenant's national origin because of their name or identifying information.
These practices, though less blatant than their predecessors, are still against the law. With that in mind, every real estate investor needs to familiarize themselves with the Federal Fair Housing Act, as well as any ongoing legislative changes. Otherwise, you could end up making some of those unfortunate uninvited solicitations and you could find yourself on the receiving end of a lawsuit.
The bottom line
While blockbusting may not exist in the same form it once did, that does not mean that real estate practices are completely free of discrimination. To that end, it's crucial that real estate investors put time and energy into learning about the Fair Housing Act and the protections that it provides. However, beyond that, it's also important to examine your own personal biases and to make a commitment to providing equal opportunity housing to everyone in your network.