The Long Shadow of Housing Discrimination: Evidence from Racial Covenants

Abstract Racial covenants in housing deeds were widely used in the United States during the early 20th century to segregate neighbourhoods. In 1948, the Supreme Court decision in Shelley v. Kraemer made racial covenants unenforceable in court, stopping short of prohibiting them entirely. We surmise that even after losing their judicial enforceability, such covenants could have shaped segregation if they served as a focal point for coordination on an initial equilibrium in neighbourhood formation, a context characterised by investment durability and path dependency. To test this hypothesis, we assemble novel parcel-level data on racial covenants and develop a quasi-experimental design that exploits delays between covenant execution and housing construction to isolate exposure to enforceable covenants at the time neighbourhoods were built. Covenant enforceability indeed affected early-stage neighbourhood formation in terms of housing characteristics, public infrastructure placement, and the composition of initial residents. These early differences proved durable: A one standard deviation increase in neighborhood exposure to enforceable covenants accounts for 6%–24% of the observed neighbourhood racial segregation from 1980 to 2020 and 3.1%–4.4% of housing price differentials in the 21st century. We conclude that by coordinating beliefs and decisions during neighbourhood formation, the law generated spatial inequality that has long outlived racial covenants themselves.