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People have long believed that different groups of people divided by social stratification have different incomes and different consumption. Low-income people buy cheaper items, buy less frequently, and spend less in total. In addition, social welfare may also help reduce some expenses. However, Desmond observed the rental and financial markets in the United States and found that the poor actually paid higher prices for the same or similar quality goods. The rent of houses with poor environment and location is not much lower than that of houses with good conditions in urban areas. In terms of the income of landlords, the income of landlords in poor areas seems to be higher. Only a few cities such as New York are exceptions. As for the financial market, they often have to pay higher interest. "Payday loans" and usury are all financial situations that they cannot escape - this is also described in JD Vance's "Hillbilly Elegy".

Still from Hillbilly Elegy (2020).

Recently, the Chinese version of "Creating Poverty: An American Problem" was published. This article is excerpted from the chapter on renting and financial markets in the book with the permission of the publisher.

The excerpt has been edited and the title is given by the excerptor. For notes, see the original book.

Original author｜[US] Matthew Desmond

"Creating Poverty: An American Problem", written by Matthew Desmond [US], translated by Dong Mengyu, CITIC Press, May 2024.

History of the rental market:

A racism issue

In the late 18th and early 19th centuries, as people flocked to cities and urban land values ​​soared, landlords began to subdivide their homes to accommodate more people. In 1837, a financial crisis plunged the United States into a severe economic depression, known as the Panic of 1837. The crisis led to a further expansion of subdivision, with basements, attics and storage rooms converted into studio apartments and rented to poor families. People found that this form of renting was profitable even in a catastrophic economic recession. In major cities in the West, the poor were squeezed by high rents. In the mid-19th century, so-called "tenements" began to appear in New York City, but the rents of these houses were 30% higher than those of better apartments in the city; the same situation was also seen in the poorest slums.

Racism and exploitation feed off each other. During the Great Migration of 1915-1970, large numbers of black families moved north. They experienced this connection firsthand when they arrived in cities like Cleveland and Philadelphia. In these places, black families were trapped in slums and forced to accept housing that no one else wanted. Laws spelled out where black families could live, and the police enforced the rules. Since landlords in slums could charge higher rents to tenants trapped there, they did so.

During the Great Migration, blacks lived in the worst housing in the city, often paying twice as much in rent as their white counterparts. As late as 1960, black residents of Detroit still paid higher rents than whites, according to median rents. In A New Era, author Isabel Wilkerson summed up the situation: “The lowest income people were forced to pay the highest rents for the worst houses, owned by people who were not in the area, trying to squeeze as much money as possible out of a place where no one cared.” As northern cities became increasingly black, real estate developers saw a more lucrative opportunity: They could buy properties on the edge of slums and convert them into apartments, squeezing as much profit as possible out of the existing housing stock until the houses were declared (or should have been) uninhabitable.

"Sunshine in a Foreign Land", written by Isabel Wilkerson [USA], translated by Zhou Xu, Cultural Development Press, January 2019.

In the United States, exploitation in the ghetto has been going on for a long time. Money created the ghetto because the ghetto created wealth. So what is the situation today?

Landlords in poor neighborhoods can make more money

America’s poor continue to be crushed by high housing costs. Rents have more than doubled in the past 20 years, and tenants’ incomes have not kept pace. The median rent in 2000 was $483; by 2021, it was $1,216. Housing costs have increased in all regions of the country. Since 2000, median rents have increased 112% in the Midwest, 135% in the South, 189% in the Northeast, and 192% in the West. Why are rents rising so fast? Experts tend to repeat the same mechanical answer to this question: “There’s not enough housing supply and too much demand; government regulations and zoning restrictions increase construction costs, which are passed on to tenants, and landlords have to raise rents to get a reasonable return.” Is this really the case? How do we know this is the case? Are only landowners of the past driven by money and profit, while modern landlords are guided by invisible market forces and oppressed by government bureaucracies? We need more housing, that much is undeniable. But even in cities with an ample supply of apartments, rents are rising. At the end of 2021, nearly 19% of rental homes in Birmingham, Alabama, and 12% of rental homes in Syracuse, New York, were vacant. However, rents in these two cities had increased by about 14% and 8%, respectively, in the previous two years. The data also shows that rental income has far exceeded landlords' costs in recent years, especially for multi-family homes located in poor communities. Rising rents are not just a reflection of rising operating costs. There is also a situation that the poor have few choices in housing, especially poor black families. Therefore, landlords can charge higher rents - and they do so.

To see if actual data supports this conclusion, I worked with scholar Nathan Wilmers (now a professor at MIT) to obtain a non-public version of the U.S. Census Bureau’s Rental Housing Finance Survey. The survey includes a range of questions about the income and expenses of landlords, ranging from small landlords who own a few rental units to large landlords who manage multiple large rental properties, and everyone in between. Using this data, we subtracted the landlord’s expenses from his or her income to estimate the profit of rental housing. We found that after deducting regular expenses, landlords in poor neighborhoods can make about $300 in profit per apartment per month, landlords in middle-class neighborhoods can make $225, and landlords in wealthy neighborhoods can make $250.

Book cover of the English version of "Poverty, by America".

Could it be that homes at the lower end of the market are older and cost landlords more to maintain? Or perhaps landlords are often left holding the bag because of problems like late rent and high vacancy rates? Could landlords be raising rents to counter these situations? We asked this question, too, taking into account roof repairs, plumbing problems, broken furnaces, cracked windows, electrical system problems, and dozens of other things that cost landlords money; we also adjusted for late rent and vacancy. We found that after accounting for all expenses (including regular costs like water, taxes, and insurance, as well as non-routine costs like installing toilets and vacant homes), landlords in poor neighborhoods still made about $100 a month in profit per apartment, while landlords in rich neighborhoods made only $50 a month. Across the country, landlords in poor neighborhoods were not at a disadvantage and often made twice as much as landlords in rich neighborhoods after accounting for all costs.

But in the hottest places in the country, the opposite is true. In New York City, for example, being a landlord in Soho is more advantageous than being a landlord in the South Bronx. However, New York and other large cities with higher costs of living are exceptions. In cities with more typical housing prices, such as Orlando, Little Rock or Tulsa, being a landlord in low-income communities is a better option, especially in cities with the lowest housing prices in the country.

Why do landlords in poor neighborhoods make more money? Because their regular expenses (especially mortgages and property taxes) are much lower than those in wealthier neighborhoods, but rents are only slightly lower. In many cities with average or below-average housing prices (like Buffalo, but not places like Boston), rents in poor neighborhoods are not much cheaper than in middle-class neighborhoods in town. From 2015 to 2019, the median monthly rent for a two-bedroom apartment in the Indianapolis metropolitan area was $991; in neighborhoods with poverty rates over 40%, the median monthly rent was $816, only about 17% lower. In extremely poor neighborhoods, rents are lower, but not as low as people think.

The above theory is about things, not people.

Still from Homeless to Harvard: The Liz Murray Story (2003).

Some landlords who rent to the poor take advantage of run-down buildings, drain them of value, and then leave them alone, causing damage to cities. Much of our housing woes are due to a small number of predatory landlords. For example, in Tucson, Arizona, and Fayetteville, North Carolina, the top 100 buildings that most frequently evict tenants account for 40% of the city's evictions. I have met landlords who deserve the title of "slum landlords" but also those who are doing their best to provide decent housing for low-income families. I have met small owners who rent out their homes at low prices, and I have met large real estate developers who strive to achieve "zero evictions" through diversion programs.

Many landlords start investing in real estate because they don’t have enough money saved for retirement or don’t want to work a “normal” job where the boss keeps an eye on them and they have to go to get off work on time. Rental housing is a sideline and “passive income”, but when these people become landlords, they turn this investment into their main business, that is, they see this business as “active income” and a source of income for their living when they are older. This puts excessive pressure on assets and makes landlords want to make as much money as possible.

Still from Winter's Bone (2010).

This is not inherently problematic, but the problem is that the asset in question happens to be someone’s home, and raising rents makes the people who live in it poorer. This doesn’t mean that the average landlord can make as much money as, say, an accountant, but it does mean that if someone wants to rent out their property to earn the same income as they would in a traditional job, or to achieve the retirement freedom that the average adult would need to save for many years, they can often only do so by exploiting their tenants. It’s not easy to say that successful landlords are all “bad guys.” As a landlord, being greedy for money can lead to exploitation, but so can being frugal and prudent—especially if everyone does it, which is like what people often say, “business is business.”

A house that cannot be moved,

House that cannot be bought

If the rent in a better community is not much more expensive, why don't poor families move there? This question has a premise, that is, it assumes that the situation faced by poor families when moving is the same as that of rich families: they move to live in a better house, have a better community and school. But in fact, it is more common that moving is not an opportunity for poor families, but an emergency or even a trauma.

They move under difficult conditions because they have to leave—they are evicted by landlords, rejected by the city, or the neighborhood has become too dangerous; they do everything they can to avoid the worst neighborhoods and accept whoever approves their housing application first. And when they want to leave the neighborhood they were forced to move into, there are many obstacles preventing them from moving to a better place. Poor tenants often have a history of evictions and criminal records, low credit scores or no credit history, and no one is willing to sign a contract to guarantee them and make landlords feel more at ease. Minorities and those with children also face discrimination from landlords.

Every 10 years since the 1970s, the U.S. Department of Housing and Urban Development has conducted a massive assessment of housing discrimination. These studies involve hundreds of paired actors, who are identical in every way except for their race, applying for the same apartment in major cities. That study and others like it show that while levels of discrimination have declined over time, black tenants still often face injustices when searching for apartments.

Still from Hillbilly Elegy (2020).

Poor tenants can’t buy homes either, not because they’re too poor to make their mortgage payments on time—if people can pay their rent, they almost certainly can. But several factors keep them from even trying. In the fall of 2021, when I met Lachia Higbee, she was working at an Amazon warehouse and living in a four-bedroom house in Cleveland with her two adult daughters, her 16-year-old son, and her two granddaughters. The monthly rent was $950, and Lachia was fine with that, even though the house had thin, drafty windows and a heating bill that could run as high as $500 a month. If she’d bought the house on a conventional loan, she’d have paid about $577 a month, including property taxes and insurance. That’d save her $373 a month, and Lachia might have saved enough to get new windows.

But even if she had a good credit score and managed to save enough for a down payment, her chances of getting a mortgage to buy an affordable home were slim, because banks were unwilling to provide loans for the type of homes she could afford. Without such loans, poor families have to pay high rents for homes they could otherwise afford.

In the not-too-distant past (1934-1968), banks avoided doing business in low-income and black neighborhoods because the federal government refused to provide mortgage insurance in those communities. Today, banks still do not do business in these communities because it is more profitable to do business elsewhere. Redlining may no longer be official U.S. policy, but poor and predominantly black communities, and even entire towns, still have difficulty getting loans. Millions of tenants accept exploitative housing conditions not because they cannot afford better options, but because they often have no choice.

Paying for poverty in financial markets

You can read prohibitions against usury in the Vedas of ancient India, Buddhist texts, and Jewish law books. Philosophers Aristotle and Aquinas also condemned usury, and Dante condemned loan sharks to the seventh circle of hell. Although they failed to curb the practice of trapping the poor in debt, these texts show that the history of this immoral practice of trapping the poor in a cycle of debt is at least as old as the written word. Aside from slavery, usury may be the oldest form of exploitation. Many writers have portrayed the poor in America as ignored, invisible, and forgotten. But the market has never turned a blind eye to the poor, especially the financial market.

Still from Mean Streets (1973).

In the 1980s, the government deregulated the banking system, which increased competition among banks. Many banks responded by raising fees and requiring customers to have minimum deposits. In 1977, more than a third of banks offered fee-free accounts; by the early 1990s, only 5% of banks offered this service. Big banks got bigger, and community banks closed. In 2019, the largest banks in the United States charged customers $11.68 billion in overdraft fees, of which 84% was borne by 9% of account holders. Who are the 9% who are being sucked out? The answer is those customers who have an average savings of less than $350. The poor are forced to pay for their poverty.

In 2021, the average overdraft fee for an account was $33.58. Since banks often charge fees multiple times a day, you could easily end up paying $200 in overdraft fees for a $20 overdraft. Banks can and often do deny accounts to people with a history of overdrafts, but these customers also provide a steady stream of revenue for some of the world’s most powerful financial institutions.

For most of American history, banks served white people. To this day, black people can have a bad experience when they go to the bank. Some bank employees stereotype black customers and accuse them of fraud. Black people's loan applications are rejected more often than customers of other races and ethnicities, and even if they can get a loan, they have to pay higher interest. A 2021 study found that middle-class black homeowners (earning $75,000 to $100,000 a year) pay higher interest on mortgage loans than white homeowners who earn $30,000 or less a year. According to the Federal Deposit Insurance Corporation (FDIC), in 2019, one in 19 households in the United States did not have a bank account, totaling more than 7 million households. Compared with white households, black and Hispanic households are nearly five times more likely to be unbanked.

Still from Ordinary People (1980).

Where there is exclusion, there is exploitation. Unbanked Americans created a market that is now served by thousands of check-cashing institutions. The formula is simple: The first step is to open stores in low-income and non-white communities. As banks moved out of black communities and black customers stopped engaging with banks, alternative institutions filled the gap. Small community banks that were proud of the services they provided, those that once provided staunch support for Little League and the Boy Scouts, have been replaced by check-cashing stores with bright yellow and red signs that read "Cash Checks." Payday loan shops and check-cashing stores are more common in less-poor black communities than in more-poor white communities, but the opposite is true for traditional banks.

The second step is to open longer hours than traditional banks, even around the clock, and on weekends, because if a customer receives a check on Friday, many people cannot wait until Monday to use the money. The third step is to cash all checks, including salary checks, government checks, and personal checks, without credit checks and without requiring customers to have bank accounts.

Documentary Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders (2007).

The final step is to charge a service fee. Depending on the type of check, cashing shops charge between 1% and 10%. This means that a worker making $10 an hour who works 100 hours in two weeks and then takes a $1,000 check to cash will have to pay a fee of $10 to $100 to get their hard-earned money, which is equivalent to 1 to 10 hours of work wasted (but this form of exploitation is more acceptable to many people than the unpredictable tricks of traditional banks, such as automatic debits, at least it is obvious). Big companies are also getting in on the action, such as Walmart, which now allows checks of up to $1,000 to be cashed. In 2020, Americans spent a whopping $1.6 billion on cashing checks. If the poor could get their money without any additional expenses, they could keep more than $1 billion more in their pockets during the recession caused by the new coronavirus.

Being poor can mean being unable to make payments on time, which can ruin your credit. Beyond a bad credit score, having no credit score at all is just as troublesome, and that’s the case for 26 million adults in the U.S. Another 19 million people don’t have a credit score because their credit history is insufficient or old. Having no credit score (or a bad credit score) can keep you from renting an apartment, getting insurance, or even getting a job, as employers increasingly look to applicants’ credit scores in the hiring process. People will inevitably encounter situations in their lives, such as being shortchanged on their work hours or having car trouble, and that’s when the payday loan industry comes into play.

To apply for a payday loan, you need a pay stub and valid ID, and you need a bank account. This means that while the industry caters to low-income people, it doesn’t target the unbanked at the bottom of the market. (Payday loan customers make about $30,000 a year.) Customers borrow a small amount, usually less than $500, and usually pay a percentage fee for every $100 borrowed. A fee of $15 per $100 may sound reasonable, but it actually amounts to a 400% annual interest rate. The loan broker will ask the borrower to provide a repayment method, such as access to the borrower’s bank account or a post-dated check for the full loan amount plus a fee. Most of these loans have a term of 2 to 4 weeks and are repaid until the next payday, hence the name "payday loan."

However, when the loan matures, you are often still penniless, so you ask for an extension of repayment, for which you have to pay more money.

For example, you take out a $400 loan that is due in two weeks, plus a $60 processing fee ($15 per $100); when the initial loan is due, the loan broker may allow you to extend it, provided that you pay the $60 processing fee first, and then he will charge you another processing fee, such as another $60. So you have been charged $120 for borrowing $400, and that's just the one time you asked for an extension. 80% of payday loans are extended or renewed. Because payday lenders have access to your bank account, they can overdraw your account, so you are saddled with the loan fee plus the bank's fees. About a third of payday loans are now issued online, and almost half of people who take out online loans have their bank accounts overdrawn by the lender. The average borrower is in debt for five months and has to pay $520 in fees to borrow $375. For payday lenders, getting people into debt is the best outcome, which is how they turn a $15 profit into $150.

A high price

Alternative banking products rely on two conditions: first, the vulnerable have urgent real needs, and second, practitioners in this industry know that their customers' financial difficulties will last for a long time, even if the customers themselves are reluctant to admit it. When you walk into a payday loan institution, your eyes are only focused on the current situation—your rent is overdue and you may be evicted by the landlord; your power is about to be cut off. (70% of people apply for payday loans to pay rent, utilities or other basic living expenses.) But the lender is concerned about your future. It has foreseen that you will rush in 14 days later and cannot pay the principal and interest; it knows that you will sign the extension documents; it also knows that you will extend it again next month. In the eyes of the lender, you are a big deal.

Lenders compete on location, hours, and how quickly they process applications, but they don't compete on fees. They know that customers are in a hurry and won't shop around. This means that loans are expensive and borrowers get ripped off no matter which store they go to. Therefore, traditional banks can compete with payday lenders by offering short-term loans at much lower fees.

Still from Winter's Bone (2010).

One study estimates that commercial banks could make a profit by charging only one-eighth of the market price for short-term loans. But so far, no bank wants to do this. It is not the same as charging low-income customers overdraft fees, because although these fees are borne mainly by the poorest customers, they are ostensibly applied to all customers. But being in the payday lending business means offering financial products designed specifically for low-market customers, and these loans can carry an effective annual interest rate of 40% to 80%, which brings a bad reputation.

So far, executives at institutions like JPMorgan Chase and Citigroup have decided that the effort isn’t worth it. If payday borrowers are price-insensitive (as most hard-pressed people are), and if most commercial banks continue to deny service to the poor, then the market failure that favors the payday industry will persist. Payday lenders charge high fees not because lending to the poor is risky—most borrowers eventually repay, even after multiple delays. Lenders charge high rates because they can.

Every year, people pay more than $11 billion in overdraft fees, $1.6 billion in check-cashing fees, and a whopping $9.8 billion in payday loan fees. That works out to $61 million a day, borne primarily by low-income people, and that doesn’t include the money pawn shops, title loan services, and lease-purchase businesses make each year. James Baldwin remarked in 1961 that “it’s a dreadfully expensive thing to be poor,” but he probably couldn’t have imagined just how expensive it was.

Original author/Matthew Desmond

Excerpt/Luodong

Editor/Xixi

Proofreading of the introduction/Liu Jun