Wealth disparities for middle-income Hispanics and blacks have worsened
over the past three decades relative to white families, largely because of a
lower likelihood of owning homes and retirement accounts, according to the Urban
Institute.
New research from the Washington, D.C.-based nonprofit points to an
extraordinary wealth inequality between the races. Whites on average had six
times the net worth of blacks and Hispanics in 2010, or $6 for every $1 (an
average of $632,000 vs. $103,000). Comparing the median that year, whites
actually had eight times as much wealth.
Wealth or net worth is defined as a person's total assets -- such as bank and
retirement accounts, and home value -- minus debt -- which includes mortgages,
student loans and credit card balances.
The income gap, by comparison, is much smaller.
In 2010, the average income for whites was twice that of blacks and Hispanics
($89,000 vs. $46,000), meaning that for every $2 whites earned, blacks and
Hispanics earned $1.
"What we see looking at wealth disparities is that African-Americans and Latinos
are not on the same wealth-building trajectory as white families," said Caroline
Ratcliffe, a senior fellow at the Urban Institute and co-author of the report.
"They are less likely to own homes and retirement accounts, so they miss out on
these traditionally powerful wealth-building tools."
The report found the racial gap grows sharply with age. Early in wealth-building
years (when adults are 32 to 40), white families have on average 3.5 to 4 times
that of families of color -- $184,000. But by the peak years (ages 59 to 67)
that had skyrocketed up to $1.1 million -- seven times more than blacks and
nearly five times more than Hispanics.
The Urban Institute's report, "Less than Equal: Racial Disparities in Wealth
Accumulation," was funded by the Ford Foundation, the Russell Sage Foundation
and the Annie E. Casey Foundation. The researchers reached their conclusions
using data from the 1983 to 2010 editions of the Federal Reserve Board's Survey
of Consumer Finances.
Jim Carr, a senior fellow at the Center for American Progress in New York, said
the report reinforces several recent studies from other organizations, such as
the Pew Research Center, showing the racial wealth gap continues to grow wider.
He sees the housing market as a key factor.
"The disproportionate loss of homeownership among people of color is the largest
contributor to the startling increase in wealth disparity," Mr. Carr said.
"Severely depressed home prices are another contributor. To the extent home
prices recover, families that have managed to hold on to their homes will also
begin to recover their lost wealth."
But, he said, the racial wealth gap overall may grow further since so many
families of color lost their homes.
"Proposals to rebuild the housing finance system going forward must better serve
people of color," Mr. Carr said. "In particular, our rebuilt housing system must
support the leveraging of current historic low mortgage rates and significantly
depressed home prices to enable people of color to become homeowners."
He said most proposals now being considered do not address either promoting
affordable homeownership or the need to serve borrowers of color.
"In fact, most proposals to restructure or replace Fannie Mae and Freddie Mac
acknowledge the inadequacy of those recommendations to promote affordable
homeownership and suggest that goal should be solely the role of [the Federal
Housing Administration]."
The Great Recession from 2007 to 2009 didn't cause the wealth disparities, but
it did magnify them. White, black and Hispanic families all experienced sharp
declines, but Hispanics experienced the largest (40 percent) due to lower home
values. Black family wealth was hit hardest by falling retirement account
balances (31 percent decline). The wealth of white families fell 11 percent,
according to the report.
A lot of Hispanic families bought homes just before the recession with higher
debt-to-asset values. They started with higher debt-to-asset values, and the
steep decline in housing prices meant an even steeper decline in their wealth.
This meant they were more likely to end up underwater or with negative home
equity. Between 2007 and 2010, Hispanics saw their home equity cut in half,
compared with about a quarter for black and white families.
Black families were more likely to withdraw money from their retirement savings
after a job loss or some other adverse event, which led to larger declines in
retirement savings.
"Wealth isn't just money in the bank. It's insurance against tough times,
tuition to get a better education and a better job, savings to retire on and
springboard into the middle class. In short, wealth translates into
opportunity," wrote Ms. Ratcliffe and co-authors Signe-Mary McKernan, Eugene
Steuerle and Sisi Zhang in the Urban Institute report.
Ms. Ratcliffe said it's the automatic process of saving that helps people build
wealth over time. As they pay off a mortgage, they build equity even if home
values decline. Automatic payroll deduction for company retirement plans is
another form of passive saving.
"We know wealth is passed from generation to generation, and we know that
African-American and Hispanic families are about five times less likely than
whites to inherit money and, when they do, they inherit less. These things
contribute to the wealth gap and have a ripple effect on one generation to the
next."
For more information on calculating your personal net worth, you can refer to
Bankrate.com's net worth calculator at
www.bankrate.com/rtrs/calculators/personalfinance/net_worth_calculator.asp.
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