Wealth Gap Rises to Record Highs Between Racial Groups

The Great Recession has had a disproportionate impact on the net worth of households depending on their race, according to a new extensive report from the Pew Research Center which analyzes newly-available government data from 2009.

The report summary finds that the housing collapse that began in late 2007 took a far greater toll on the wealth of blacks and Hispanics as opposed to whites.  They find, “From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households.”

“It’s not so much that the wealthy were busy getting richer – it’s that they slipped back less than those at the other end of the ladder,” says Rakesh Kochhar, a demographer and co-author of the study.

“If you’re less wealthy, you’re more reliant on single assets,” Mr. Kochhar explained. “If you’re more wealthy, you have multiple assets.”

Mr. Kochhar added that because Hispanics and African-Americans are far more likely to be unemployed because of the recession, that has led to a greater decrease in assets. It might mean that blacks and Hispanics have to tap into savings and pension funds sooner than their white counterparts or that they have go into debt to be able to survive.

A 25-year look at wealth ratios shows that “the white-to-black and white-to-Hispanic wealth ratios were much higher in 2009 than they had been at any time since 1984.”

The report found that the loss of home values were the principal cause for the decline in household wealth among all groups, but Hispanics in particular were the group hardest hit by the housing collapse.

“From 2005 to 2009, the median level of home equity held by Hispanic homeowners declined by half-from $99,983 to $49,145-while the homeownership rate among Hispanics was also falling, from 51% to 47%,” the report finds.

One explanation is that Hispanics lived in areas that were hit hardest by the collapse.  They report, “A geographic analysis suggests the reason: A disproportionate share of Hispanics live in California, Florida, Nevada and Arizona, which were in the vanguard of the housing real estate market bubble of the 1990s and early 2000s but that have since been among the states experiencing the steepest declines in housing values.”

Whites and blacks, however, all saw declines in home equity during this period.  They report, “Among white homeowners, the decline was from $115,364 in 2005 to $95,000 in 2009. Among black homeowners, it was from $76,910 in 2005 to $59,000 in 2009. There was little or no change during this period in the homeownership rate for whites and blacks; it fell from 47% to 46% among blacks and was unchanged at 74% among whites.”

Household wealth represents the accumulated sum of all assets which includes houses, cars, savings and checking accounts, stocks and mutual funds, retirement accounts among other assets and is subtracted from debt in the form of mortgages, auto loans, credit card debt among other forms of debt.

This differs from household income, which is the measure of the annual inflow of wages, interest and other forms of earning.

Reports PEW, “Wealth gaps between whites, blacks and Hispanics have always been much greater than income gaps.”

“We know that the income gap is not as large; it has gotten smaller,” said Tatjana Meschede, research director at the Institute on Assets and Social Policy at Brandeis University. “But the wealth gap is stubbornly high.”

Tom Shapiro of Brandeis University, who has studied the racial wealth gap for years, told National Public Radio that he is concerned about the long-term impact of this trend. He believes the wealth gap will likely grow even more, unless the economy turns around soon.

“If a family doesn’t have enough for a safety net for itself, it can’t think about moving forward or moving ahead,” he told NPR.

The researchers also note that while the available two data points, 2005 and 2009, allow for “a before-and-after look at the impact of the Great Recession” they do not line up with the downturn which officially ran from December 2007 and ended in June 2009.

Therefore, in 2005, the housing and stock markets were still rising, leading the PEW researchers to believe that the actual declines are steeper than captured in this study.

They also note, “Moreover, since the official end of the recession in mid-2009, the housing market in the U.S. has remained in a slump while the stock market has recaptured much of the value it lost from 2007 to 2009. Given that a much higher share of whites than blacks or Hispanics own stocks — as well as mutual funds and 401(k) or individual retirement accounts (IRAs) — the stock market rebound since 2009 is likely to have benefited white households more than minority households.”

The critical question is why the housing bubble had a much larger impact on blacks and Hispanics than whites.  The answer appears to be that blacks and Hispanics have a much greater percentage of their net worth tied up in housing, as opposed to the stock market and other forms of investment.

Thomas Shapiro, a law and social policy professor who directs the Institute on Assets and Social Policy at Brandeis University, explained to the Christian Science Monitor, “For nonwealthy people in the US, the huge preponderance of the wealth they have is in home equity.”

“As the housing crisis slammed into America,” explains Dr. Shapiro, “it slammed harder” in those states, as well as in low-income communities. Dr. Shapiro also notes that minorities tend to be more recent homeowners, who have had less time to build up home equity.

“White households have been more diversified – they are more likely to own stocks and bonds,” Mr. Kochhar added.

During the period under study, wealth disparities increased, not only between racial and ethnic groups, but they also rose within each group, the researchers report.

They write, “Even though the wealthiest 10% of households within each group suffered a loss in wealth from 2005 to 2009, their share of their group’s overall wealth rose during this period.”  From this they conclude, “These trends indicate that those in the top 10% of the wealth ladder were relatively less impacted by the economic downturn than those in the remaining 90%.”

None of this should be very surprising.  What is clear is that there remains a pretty substantial gap in terms of net wealth between whites, and blacks and Hispanics.

Despite some gains by the two minority groups since the mid-1980s, the gap is huge and it is growing

Moreover, those minority groups appear more susceptible to economic downturns, and we see the reason why.  Most of their wealth is tied up in their homes, whereas whites appear to have a much more diverse portfolio.

The numbers should be frightening however.  In 2009, a typical black family had only about $5,600 in wealth; a Hispanic family had about $6,300, while a white family had over $113,000.

Think about that for a moment.  Those are just staggering numbers.

—David M. Greenwald reporting