Wednesday, February 27, 2013

The Racial Wealth Gap

Neil Shah @ Wall Street Journal:
White families build wealth faster than black households, a phenomenon economists call the “racial wealth gap.” What explains this growing divide?

The biggest drivers, new research shows, are home ownership and income levels. Tracking 1,700 working-age households from 1984 to 2009, researchers at Brandeis University’s Institute on Assets and Social Policy found that, among households whose wealth grew over the period, the number of years owning a home accounted for nearly 30% of the difference in the relative growth in wealth between white and black families.

Family income accounted for another 20% of the widening gulf in wealth. Other factors include college education, inheritances and unemployment. All told, these five factors accounted for 65% of the increasing wealth gap, researchers said.

The findings are the latest evidence that barriers in workplaces, schools and communities — rather than personal attributes and cultural factors — may be making it harder for blacks to accumulate wealth than whites over time. Wealth, the sum of assets like homes, cars, stocks and bank and retirement accounts, minus debt, is a key gauge of economic well being — and can be passed on to future generations.

The housing bubble’s collapse in 2006 and the recession from late 2007 to mid-2009 helped push this wealth gap between whites and blacks to unprecedented levels. In 1984, the median net worth of white families — the level at which 50% had less wealth and 50% had more — was $90,851 compared with just $5,781 for black families, a gap of $85,070. By 2009, this gap had ballooned to $236,500.

Home ownership is the biggest contributor to net worth. But white families, the researchers say, buy homes and start acquiring equity on average eight years earlier than black families, largely because white families can lean on their own families for help with down payments. Because of less access to credit, lower incomes and government policies, they say, the homeownership rate for white families is 28.4% higher than for black families.

The recession had a disproportionately bad effect on blacks, researchers said. “Half the collective wealth of African-American families was stripped away during the Great Recession due to the dominant role of home-equity in their wealth portfolios and the prevalence of predatory high-risk loans in communities of color,” said Thomas Shapiro, director of the Institute on Assets and Policy. “Borrowers of color are more than twice as likely to lose their homes.”

Meanwhile, accomplishments like job promotions and pay increases don’t appear to pay off for black families the way they do for whites. “Every dollar increase in average income over the 25-year study period added $5.19 wealth for white households, while the same income gain only added 69 cents for the wealth for African-American households,” Shapiro says.

Differences related to inheritances, college education and unemployment also play a role. Whites are five times more likely to inherit, while 80% of black students graduate with debt compared with 64% for whites. “Similar college degrees produce more wealth for whites,” Shapiro said.

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