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How the housing market and retirement system are tilted against black and Hispanic workers

Photo by John Moore/Getty Images

The mortgage meltdown that preceded the Great Recession decimated minority wealth in my neighborhood, a majority–African-American suburban community in South Chicago. Housing prices fell, and remain more than 30 percent below what they were in 2006. Our area is still dotted with dozens of fading for sale signs, sometimes in front of foreclosed or empty homes. Things never fully recovered.

Race and segregation play a big role in this story. Five of the 10 Chicago zip codes with the highest foreclosure rates are at least 94 percent African American.

And this is a national problem. As one shocking 2011 report concluded: "Approximately one-quarter of all Latino and African-American borrowers have lost their home to foreclosure or are seriously delinquent, compared to just under 12 percent for white borrowers."

In the runup to the foreclosure crisis, nearly 50 percent of loans to African Americans were subprime. Nonwhite homeowners were much more likely than white homeowners to receive subprime loans — even when the nonwhite applicants qualified for better mortgages.

Black borrowers are charged roughly 0.3 percentage points more in interest than white borrowers, even accounting for individual debts and credit histories. (That translates to an extra $40 per month on a $250,000 mortgage.) And that common phrase "accounting for" itself freezes in amber many other factors, which are themselves the product of long-term disparities.

Minorities’ struggles with homeownership are one facet of a larger story. When all types of investments are taken into account, there’s a startling wealth gap between white people and African Americans — and between white people and Hispanics. According to the Federal Reserve’s Survey of Consumer Finance, the median net wealth of non-Hispanic whites in 2013 was about $142,000. The comparable figure among nonwhite and Hispanic Americans was $18,100, down from $21,900 only three years before.

What explains the gap? It’s obviously hard to generalize about the decisions and circumstances of millions of white, black, and Hispanic households. The tangled causal pathways are often hard to pin down. But a big part of the story is that young white people tend to come from more economically secure backgrounds, making it easier for them to make educational and financial investments early in life that pay off in the long run.

With less wealth to start, it’s harder for minorities to invest for the long term

As a percentage of annual income, non-Hispanic white workers have three times as much in retirement accounts as their Hispanic or African-American counterparts. And when researchers examine what’s actually in different retirement accounts, African-American and Hispanic workers are notably less likely to invest in high-yielding stocks instead of safer investments such as bonds or money market funds. Only 30 percent of black people have stock investments, compared with 57 percent of white people.

Underexposure to equities softened the blow of the stock market swoon of 2007 and 2008, but it also deprived minority households of corresponding gains when markets recovered.

Some of these disparities reflect differences in investment sophistication that might be reduced through information and behavioral-economic nudges. Programs that automatically enroll workers into sensible low-fee target-date funds — and then let them opt out if they want to — would be helpful. But the larger problems go beyond information and reflect the reality of people’s economic and family lives.

Kai Yuan Kuan and colleagues tracked workers’ 401(k) contributions, investment practices, and withdrawals at a single firm between 2003 and 2010. It’s good practice for workers to save 20 percent of their gross income, but few workers in any racial or ethnic group managed to do that.

Still, white people managed to accumulate much more money than their minority counterparts. And, surprisingly, the gap didn’t arise because white people contributed that much more. Median 2010 contribution amounts were similar across racial and ethnic groups. The difference was that nonwhite workers were more likely to withdraw money or to borrow against their 401(k) accounts.

Minority workers effectively used their retirement accounts as a short-term savings vehicle and emergency fund rather than as a long-term tool for retirement. Not surprisingly, then, they invested their 401(k) in money market funds and other really safe assets. Although these choices provide low long-run returns, they make a certain amount of sense for families who have little other wealth and who might need to address an unexpected contingency or help a loved one facing sudden need.

In short, our 401(k) system was designed by and for upper-middle-class people. It imposes penalties on early withdrawals, based on the assumption that workers will have other ways to address short-term life challenges. It doesn’t work well for workers who are less likely to have a broader financial safety net. It was entirely predictable that intergenerational wealth disparities would reproduce themselves as less-advantaged workers use the existing system differently.

Buying a house too early can be a trap

Couple with home
(bikeriderlondon/Shutterstock)
(bikeriderlondon / Shutterstock)

For better and for worse, housing is a standard aspirational path to wealth accumulation in minority communities. And it’s not hard to see why.

There is something unique about crossing the threshold at your own front door. Housing is one form of wealth that you can see, touch, and smell. Investing in a house seems less risky or ethereal than buying a stock index fund whose value can plummet at any time. Buying a home offers the prospect of gaining access to a safe and pleasant community with good, integrated schools while building family wealth at the same time.

But buying a home can be risky too. In a recent article, I emphasized that homeownership is the most leveraged and undiversified investment most of us will ever make. And every disadvantage and risk of homeownership is an even greater disadvantage and risk to families who are just starting out. If you stretch to buy a home, you can get into real trouble if something happens to your marriage or your job.

Families who lack financial reserves are unlikely to get the best mortgages, especially within an opaque and often discriminatory credit market. A lack of personal savings or access to family assistance gives many families a dangerously weak safety net if something were to go wrong.

So young families should be wary of over-investing in homeownership. Employment or family instability could necessitate costly moves. It’s wise not to leap into buying a home until one has gotten a handle on high-interest credit card and student loan debt and accumulated a nice down payment plus a few months' living expenses as an emergency reserve.

If you get on a firm financial footing first, homeownership can be a blessing. If you buy a home before you’re financially ready, it can lead to lost wealth, foreclosures, and a lot of stress.

That means many families should wait years before buying their first home. That’s a tough pill to swallow — and society should be doing more to help close racial wealth gaps. I wish the Obama administration had been much more aggressive in its efforts to help families refinance bad mortgages. And programs like Pell Grants and child care subsidies can provide financial help to people trying to move up the economic ladder whether they own a home or not.

It takes patience, hard work, and discipline to accumulate the financial rewards that make comfortable homeownership possible. The economic playing field can be pretty tilted, too. There’s no easy path to leap over racial disparities in opportunities and family resources.

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