The Wealth Gap: The False Promise of Home Ownership
The Pew Study reports a stark contrast in the wealth of households by racial group. The median wealth of white households is 20 times that of black households. The study very quickly points to differences in home ownership (non-investment real estate) as the main culprit in explaining the differences in wealth. (Because blacks and Hispanics have very similar financial characteristics and those characteristics highly contrast those of whites and Asians, I will use the stats from the black and white populations for these illustrations.) For instance:
- Only 46% of black households owned their own home, while
- Among white households, 74% owned a home.
So right off we can see black households far behind in the primary asset that contributes to wealth – a home. Owning a home is a pervasive and deep seeded American dream. It has been promoted as the sure way to wealth, by our government, our financial advisors, our ministers and any number of late night infomercials. And the above statistic seems to support this idea. Own a home, get rich.
But I am here to say this idea is misguided. It represents one of the biggest fallacies of wealth accumulation in existence. Home ownership is not a panacea. In fact, if pursued to the exclusion of other assets, especially financial assets, it can be an albatross.
To explain what I mean, let’s look deeper into the stats and include those from wealthy households regardless of race. For blacks and whites alike, home equity made up the lion’s share of net worth. For blacks however, owning this asset (or not owning it), proved much more contributory to the rise, fall or existence of net worth. For example:
- For black households that owned a home, home equity made up 56% of its net worth.
- For white households that owned a home, home equity made up 38% of its net worth.
White households tend to be more diversified than black households. Thus they were able to better withstand the downturn in the real estate market experienced of the last few years. In fact, many black households bought at the peak of the real estate bubble during the days of 110% financing and easy credit. Another study conducted by Pew tells us that 35% of black home owners are under water on their mortgage, meaning they owe more on their mortgage than their home is worth. “Only” 18% of white home owners are in this situation.
Being a little more diversified (not too much) protects wealth. Something the very wealthy, regardless of race, have figured out. According to the latest Survey of Consumer Finances:
- Of households in the top 5 percent of wealth (usually $1.5 million or more in net worth), 98% own their own home, however, home equity makes up only 15% of their net worth.
Blacks who are financially upwardly mobile, for lack of a better term, have caught on that home ownership is a great tool for wealth accumulation. But somehow, the forest was missed for the trees. Home ownership if all goes well can be a financial benefit, but in comparison to other assets available in the marketplace, real estate falls way way short on delivering functional (read: spendable) wealth. That usually comes in the form of stock, bonds, cash and business ownership. I will explore those differences in a later post. The next post however, I will look at the differences among racial groups in unsecured debts and ownership of other tangible assets like cars.
Market:
"Tax My Fortune! Please! Why Warren Buffett Should Volunteer to Pay Higher Taxes" by Daniel Gross, Contrary Indicator; Yahoo! Finance
Paying a few billion dollars in taxes that it isn't required to would allow General Electric, and any other company that follows suit, to do what most Fortune 500 firms haven't been able to do since the 1990s: claim the moral high ground. Just as a self-taxing Buffett would, a self-taxing company would garner a huge amount of publicity and positive reputation-building.
"That market plunge was so last week" by Bloomberg; Pensions and Investments
Portfolio:
"Coffee Wars: Is Dunkin’ Donuts More Valuable Than Starbucks?" by Stacy Curtain, Daily Ticker; Yahoo Finance
"Dunkin' Launches K-Cups; Starbucks Soon to Follow" by Karlene Lukovitz; Mediapost
"Starbucks CEO to DC: You've been cut off" by Charles Riley: CNN Money
Life:
"7 Tips for Writing E-mails That Won't Get Deleted" by Jill Konrath; Inc Magazine
"How to Talk with Your Children About Sex" by Planned Parenthood
"I ain't talking 'bout rich, I'm talking 'bout wealth. Wealth is passed down from generation to generation. You can't get rid of wealth. Rich is some shit you can lose with a crazy summer and a drug habit." - Chris Rock
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