Kraemer and other white property owners governed by a restrictive covenant brought suit in Illinois State court seeking to block the Shelley family, who were African-American, from owning property. The plaintiffs lost at trial, but on appeal the Missouri Supreme Court reversed and ruled that the agreement was effective and that it did not violate the Shelleys' constitutional rights. The Shelleys then appealed the case to the United States Supreme Court.

The justices ruled that a court may not constitutionally enforce a “restrictive covenant” which prevents people of certain race from owning or occupying property. Chief Justice Fred Vinson wrote for a unanimous Court. Justice Vinson pointed out that the Fourteenth Amendment prohibits discrimination by “State action,” but the actors in this case were all individuals who had privately agreed not to sell property to members of certain races. Although the contract itself was private, the plaintiff in the litigation had sought the assistance of the State court in enforcing the contractual provisions. Vinson wrote: “[A]ction of State courts and of judicial officers in their official capacities is to be regarded as action of the State within the meaning of the Fourteenth Amendment.”

He concluded: “We have no doubt that there has been State action in these cases in the full and complete sense of the phrase. The undisputed facts disclose that petitioners were willing purchasers of properties upon which they desired to establish homes. The owners of the properties were willing sellers; and contracts of sale were accordingly consummated. It is clear that but for the active intervention of the State courts, supported by the full panoply of State power, petitioners would have been free to occupy the properties in question without restraint.” Accordingly, State judicial enforcement of restrictive covenants based on race denies the equal protection of laws in violation of the Fourteenth Amendment.

Racial restrictive covenants were common at one time in many American cities. Many old deeds still contain these restrictions, though Shelley v. Kraemer made them unenforceable. Private discrimination in housing is now prohibited by Title VIII of the Civil Rights Act of 1968, as well as by statutes in most States and by ordinances in many municipalities as well.

In the 1960s and 1970s, when white residents in big cities sometimes worried about changes in the racial composition of their neighborhoods, a white family's sale of their house to a black family could be cause for neighborhood alarm. Unscrupulous real estate brokers learned that they could play on those fears by publicizing the sale, which they often did by placing a “Sold” sign prominently on the property in hopes of alarming other residents into putting their houses on the market, too.

Many cities responded by banning “Sold” signs completely. In 1977, the Supreme Court reviewed a New Jersey town rule banning both “Sold” and “For Sale” signs. The Court ruled in Linmark Associates, Inc. v. Willingboro that this ban violated the First Amendment because it “restricted the free flow of truthful commercial information.”