Accumulation of wealth prevented for generations of African-Americans:
“Legalized discrimination – where blacks were prevented, often through violence, from owning property, or loans were not granted to African-American business owners, or black homeowners could not access FHA mortgages, or blacks were excluded from unions, the police force, or fire departments – meant that black families could not amass any meaningful wealth to bequeath to future generations,” President Barack Obama said in his March 18, 2008 speech. “That history helps explain the wealth and income gap between black and white, and the concentrated pockets of poverty that persists in so many of today's urban and rural communities.”
In this now famous speech on race in America, Obama touched on the complex issue of wealth disparities between black and white families. Structural inequalities have long undermined black families from seeking or creating a legacy of wealth. Though many African-Americans have made significant strides in education and income in the past few decades, a study of wealth disparities between blacks and whites found that the average black family has roughly a dime in wealth for every dollar in wealth held by their white counterparts. Even middle-class black families with comparable education and income have about 25 cents in wealth for every dollar accumulated by similarly accomplished white families.
Why is there such a large difference? According to Thomas Shapiro, professor of law and social policy at Brandeis University, the answer is three-fold: The legacy of race, public policy, and continuing institutional discrimination. “The legacy of race in America is the accumulation of disadvantage upon disadvantage, the sedimentation of inequality [is] such that wealth is something that is created under specific circumstances and opportunities. African-Americans, Asians or Latinos do not have the same set of opportunities to accumulate wealth – property, businesses, financial instruments and savings – so they then have less to pass on.”
The roadblock to homeownership:
Homeownership is the most important source of financial security for most Americans. Home equity provides families with the means to invest in education, business opportunities and retirement. “For most middle-class families, and it’s even truer for African-American families, the wealth they have is not built up in stocks and bonds, it is in their homes. Equity, the amount our homes appreciate in value over time, is where the largest reservoir of wealth in America’s middle-class families resides,” says Shapiro.
The author of The Hidden Cost of Being African-American, Shapiro points to a number of laws that helped many white families establish wealth in the form of property, while barring black participation. Under the Homestead Act, for example, the federal government granted 1.5 million households titles to 287.5 million acres in exchange for the development of the land during the 1860s the 1930s. Few blacks were able to secure property during this racially charged period following slavery.
In her 2000 essay, “The Homestead Act: A Major Asset-building Policy in American History,” Trina Williams estimates that between 93 million Americans between the ages of 25 to 80 years are now the beneficiaries of this wealth-generating program. Almost all of these descendants of homesteaders are white, while only 4,000 African-Americans successfully secured land under the act.
The creation of the Federal Housing Administration after World War II also disproportionately benefited whites. The agency established low-cost mortgages, sparking a housing boom in which blacks were once again barred by exclusionary practices, of which the most notable was redlining. In this practice, home appraisers devised a color-coded system to determine mortgage eligibility. Green, the highest value, was given to homes in all-white neighborhoods, while red, the lowest, was assigned to homes in all-minority or mixed communities. Homes given the latter designation rarely received mortgages, resulting in highly segregated communities. Most mortgages at the time went toward suburbanizing America.
Looking at the lasting disparities caused by the appraisal system, one survey found that white homeowners who purchased mass-market suburban homes in the 1950s for around $5,000 had $300,000 in home equity some 40 years later. African-Americans, who on the other hand did not get to participate in buying those homes, purchased homes in the inner city and received substantially less wealth in equity. Even today, homes in racially segregated neighborhoods do not grow in value as fast as homes in white neighborhoods. In his book, Shapiro calculates that housing segregation costs blacks tens of thousands of dollars in home equity.
Is it too little, too late?
In these instances, Shapiro says, government policy denied an entire group of people access to the building blocks of wealth accumulation. However, even with the rise of the Fair Housing Act and other anti-discrimination laws of the 1960s and 1970s, many observers suggest that the centuries of damage done is irreparable given the nature of wealth.
“The problem is that wealth is cumulative,” says Beverly Moran, a professor of law and sociology at Vanderbilt University. “So even if everything was made OK today, you would still have this tremendous wealth gap that would keep growing because people of color were cut out of the of wealth accumulation process.”
Moran and Shapiro agree that institutional discrimination has yet to breathe its last breath in this country. If nothing else, the fallout of the subprime-lending crisis serves as an indicator. “If you look at the statistics on the mortgage crisis, there were black people being put into these horrible mortgages when they were making two and three times more than whites who received conventional mortgages,” asserts Moran, co-author of “Race and Wealth Disparity: the Role of Law and the Legal System.”
A study by First American Loan Performance found that a majority of subprime borrowers could have qualified for conventional prime-rate loans. Some 55 percent of subprime borrowers had credit scores worthy of a prime, conventional mortgage in 2005. By the end of 2006, that percentage rose to over 61 percent.
According to United for a Fair Economy’s “State of the Dream 2008,” all people in living in the U.S. will experience a staggering loss of wealth from the subprime crisis. Conservative estimates put the total direct loss for subprime loans made during recent years between $356 billion and $462 billion. African-American borrowers can anticipate a loss of between $72 billion to $93 billion.
The potential of merit-based achievement:
While these estimates paint a bleak picture, they do not discount the gains already made and opportunities that exist.
“African-Americans have made amazing movements into the middle-class based on their own merit, educational achievements, as well as job and income advancements. It’s not been reflected in the closing of the wealth gap because the wealth gap doesn’t have to do with achievement or merit-based considerations,” says Shapiro.
Indeed, the number of blacks with advanced college degrees rose from 683,000 in 1996 to 1.3 million in 2006. The income level of African-American households has also risen from an annual median of $26,468 in 1986 to $31,969 in 2006. Revenues generated by the nation’s 1.2 million black-owned businesses rose 25 percent between 1997 and 2002 to $88 billion, while the number of such companies grew by 45 percent during the same period. Despite the structural barriers to homeownership between 1940 and 2000, the homeownership rate for black households more than doubled, increasing from 22.8 percent to 46.3 percent, according to the U.S. Census Bureau.
Sound money management practices have helped many blacks’ lay solid financial foundations. Such is the case for Chad and Nicole Robinson of Mt. Vernon, NY. With individual credit scores of well over 750, the couple practically had their pick of loans when they set out to buy a home in 2006. “Since we both have excellent credit, we weren’t limited in our options. We went with 100 percent financing and were able to keep our savings,” explains Chad Robinson, 40, a history teacher at a parochial high school.
The Robinsons refused the subprime loans because they conducted their own research, and had the help of an honest broker. “Our broker made us aware of all of the bad deals, homes that were overpriced, and loans that were overvalued,” says Nicole Robinson, a 39-year-old therapist.
Prior to their house hunt, the Robinsons remained conservative with their spending habits, cutting back on expenses to pad their savings. Chad credits his financial wherewithal to his parents, who own their own home and other assets. Paying attention to their financial habits helped guide his decisions as an adult.
Growing up in a fiscally responsible household can surely influence financial behavior, but without explicit instruction, many people, regardless of race, can still fall victim to the snare of credit card debt. Take Houston based Malik Samuels for instance. “My parents always taught me to watch my spending and to save, but we never really discussed credit cards and what can be done to your credit. That I had to learn on my own,” he says.
Financial literacy is certainly a key component of wealth building, and one that is seriously lacking among young Americans of all backgrounds. Few high school seniors can explain the difference between a bear and bull market, according to the Jump$tart Coalition for Personal Financial Literacy. The organization, which administered multiple-choice financial exams to teens beginning in 1997, notes a significant decline of scores across the board. While its 2006 findings reveal that no racial group is truly financially literate, 583 out of 5,775 African-American students tested were only about 80 percent as literate as whites.
Statistics like these continue to motivate William E. Thomason in his quest to create a financial foundation for children of color. Through his seven-year-old Wall Street Wizards Urban Financial Literacy Program, Thomason provides high school students in San Francisco and the Bronx, the opportunity to participate in the financial markets. In 2008, they had over 100 students enrolled in the program, which runs from September to May. As a part of the curriculum, Thomason, through his own financial contribution as well as those of his friends and family, purchases for each child his or her own stock. He notes that participants invested in such companies as Coca-Cola, which he believes serves as a good example, given its strong returns. “Over the last 30 years, Coca-Cola continuously returned roughly 15 to 30 percent, so a 15-year-old with a good investment could have a nice chunk of change by the time he or she is 30” he says. He added that, “when parents see kids coming home with stock certificates at 14 and reading the Wall Street Journal, they want to learn themselves.”
In the 10th annual Black Investor Survey, Chicago based Ariel Mutual Funds and the Charles Schwab Corp. found that African-American investors save far less money than whites, and are no more likely to be investors today than they were a decade ago. The survey polled 500 blacks and 500 whites earning more than $50,000 annually. The median amount of money saved by blacks surveyed was less than half of their white counterparts: $48,000 versus $100,000. On a monthly basis, median savings was $182 for blacks versus $261 for whites.
The number of blacks who own stocks or mutual funds rose as high as 74 percent in 2002, only to fall to 57 percent in 2007. White participation, however, consistently hovered around 80 percent. “The big issue here is that we are less experienced than our white counterparts when it comes to investing in the stock market. Also, the stock market’s rocky start in the new century, with the bear market from 2000 to 2003, shook our confidence,” explains Mellody Hobson, president of Ariel. “Many of us redeemed our mutual funds or stock investments because of our fear of the turmoil, whereas our white counterparts diminished some of their holdings, but didn’t completely sell out.”
Cultural attitudes toward high-risk investments, says Hobson, have also hindered many blacks from entering the market. “Our data shows that as a community, wage is a bigger driver of our investing than anything else, whereas for white Americans, age becomes the gateway for investing. It’s almost like a right of passage.”
According to the survey, whites typically start investing around age 35. However, blacks are more likely to view investing as something they can look into after hitting the $100,000 income mark. “That’s an attestation to the fact that we believe that you need a lot of money to be an investor and it’s something for the elite. And yet there are mutual funds like Ariel that have low minimum investments of $50 a month.”
Hobson says individuals must take the helm of their financial futures, particularly as it relates to retirement. “Unlike the days of old where you worked for a company for 30 years, retired with a secure pension and a gold watch, it just is not how the world works today. In today's business world, you begin taking charge of your financial future through your 401(k).”
Hobson notes that recent studies suggest that even at high-income levels, minorities have a lower participation in the 401(k) plans of their companies. She says it is important for the private sector to educate employees on how to best map out retirement and take charge of finances. “Our idea is that once companies are led to do something about the disparities in 401(k) investing, it will narrow the gap between white and black participation.”