Great Recession Created a Historic Racial Wealth Gap

Before you go, we thought you'd like these...
Before you go close icon
income gapThe twin demons of the housing market crash and the Great Recession have created historic wealth gaps among ethnic and racial groups in America, according to new Pew Research analysis: The median wealth of white households is 20 times that of black households, and 18 times that of Hispanic households.

From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, but declined just 16% among whites, says Pew.

The result is a cavernous gap that's the largest since the government began publishing its Survey of Income and Program Participation 25 years ago -- roughly twice the size of the ratios that had prevailed between these three groups for the two decades prior to the Great Recession that ended in 2009, reports Pew.

The main culprit, without question, is the housing downturn. "Minorities were effected more because they draw a higher share of wealth from home equity," explains Rakesh Kochhar, associate director for research with the Pew Hispanic Center. "Hispanics, in particular, are concentrated in areas where house prices first rose steeply and then crashed harder, like Arizona, California, Florida and Nevada." The period from 2005 to 2009 captures the bulk of the effect of the housing downturn from early 2006 onwards. The Case-Shiller Home Price Index was down about 30% over the period reviewed in the Pew Research study.

Stocks Have Recovered; Houses Haven't

"Up until the housing meltdown, the basic line was a dime on the dollar: Blacks had 10 cents of wealth for every dollar of wealth held by whites," says Charles Gallagher, PhD., professor and chair, race and ethnic relations, urban sociology, inequality at LaSalle University. "The wealth gains of most African Americans and Latinos were tied to an overheated housing market rather than other assets like stocks, bonds and 401(k)s."

Homeowners of all races saw the median value of their home equity decline: Among whites, it fell from $115,364 in 2005 to $95,000 in 2009, among blacks it dropped from $76,910 to $59,000. Hispanics took the biggest hit, with their home equity declining by more than half, from $99,983 to $41,145, according to Pew.

Search Millions of Home Listings
View photos of homes for sale and apartments for rent on AOL Real Estate
In contrast, the S&P 500 was down about 11% from 2005 to 2009. "This means white households, who are more likely to own financial assets, were not affected by the stock market crash as minorities were by the housing crash," says Kochhar. Also, while the recession officially ended in 2009, the housing market has remained weak. The stock market, though, has rebounded, which tended to benefit whites more than blacks or Hispanics, who tend to have fewer such investments, reports Pew.

Also, unemployment during the recession rose more for Hispanics and blacks than for whites. "Unemployment will put a strain on your household finances, either reducing your ability to accumulate assets or cause you to draw down your assets," says Kochhar. "You may also have to borrow and go into more debt."

The economic downturn took its toll on the Asian community, too. In 2005, median Asian household wealth had been greater than the median for white households, but by 2009, Asians had lost their place at the top of the wealth hierarchy, reports Pew. Their net worth fell from $168,103 in 2005 to $78,066 in 2009, a drop of 54%. Like Hispanics, Asians are geographically concentrated in places such as California that were hit hardest by the housing market meltdown.

The rise in social inequity is good news for no one. "Wealth provides many benefits: protection against short-term economic shocks; retirement income; access to superior health; education and other services; social and political influence; security and status for future generations," says Kochhar." "The ability to reap these benefits have generally diminished for all members of society, but more so for some than others."

Joe Stallings, partner at the investment management firm Balentine, sums it up this way: "Although the focus in Washington today is on the 'here and now,' there are some serious systemic challenges facing the United States in the long-term. It seems unlikely that persistent inequality in wealth distribution, particularly as it affects the nation's fastest-growing demographic [Hispanics], is a recipe for success going forward."

How to Close the Gaps

The statistics are staggering and sobering, but is there anything to be done about them?

Sponsored Links
Harrine Freeman, author of How to Get Out of Debt, rattles off a list of ideas. "Extend some of the Bush tax cuts to help lower- and middle-income families. The bottom 80% of taxpayers received approximately 35% of the Bush tax cuts. The top 20% of taxpayers (the wealthy) received approximately 65% of the Bush tax cuts. The top 1% received 38% of the tax cuts. Increase the exemption amount for the individual Alternative Minimum Tax. Ensure that blacks with the same education level and skills as white counterparts are paid the same. Provide additional funding for college education to increase the number of students that can attend college, and reduce interest rates charged for student loans."

As for corporations, says Freeman, at a minimum, they should provide additional benefits for college education, increase reimbursement limits for college courses and employee training, and develop mentorship programs to train entry-level employees.

For individuals and families, it comes down to preparation. "Immediately build an emergency fund so as to avoid additional debt in event of unanticipated expenses, market declines, recession," says Eleanor Blayney, a certified financial planner and consumer advocate for the CFP Board of Standards. "Prepare a budget -- absolutely the best way to 'find' potential for additional savings or funds for paying down debt." In the medium term, build savings and retirement accounts through payroll deductions. And, because overall wealth is built primarily and most predictably through career development and advancement, commit to lifelong learning through education, training, and skills building.
Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading