August 16, 2011

The Wealth Gap: The False Promise of Home Ownership

The Wealth Gap
source: Nick Bastian

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.


"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


"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


"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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February 11, 2011

Payday Challenge #4: Know Your Number

Ormon calculator by faasdant
source: faasdant

Aren’t you curious about where you stand? Whether you got a B+ on the test? Or maybe this time it was an A. Aren’t you the wee bit interested in knowing if your few weeks on the P90X program has budged the needle on the scale? I bet you can’t wait until the spring when you’ll find out if your tomato garden will grow taller than your neighbor's this year because of the new ingredient you added to your fertilizer the autumn before. Is it not informative to know if your blood pressure is in the high, normal or low zones? Of course it is.

Comparative analysis is a great tool. And when it comes to your finances it is no different. Most of us are, and if we’re not we should be, curious to know if our daily financial happenings are moving us closer to financial independence or further away? Well that’s what Payday Challenge #4 is all about - “Know Your Number”. I posted a PC on Twitter and Facebook a few weeks back of similar ilk,

Payday Challenge #4: Know ur numbers. 3-parts. 1) $$ for financial independence, 2) ur savings rate, 3) the return...

We’ll get to those numbers later, but for now I am remixing that PC. The “Number” we’re concentrating on today is where each of us should stand in terms of wealth given our age and household income. I gave you the formula in the last post, “Your Wealth Ratio”. In case you missed it here it is again:

The Brick Wealth Ratio© = [(Age * Age) / (22 * (100 – Age))] * Income

If you’re math phobic don’t fret. I’ve also provided a calculator that can also be found in the previous post. All you need to do is plug in your age and income and presto, it spits out whether you have been good, bad or just plain ugly (Mom always says, “No one is ugly.”) at accumulating wealth.

But that’s not all I want you to do. The second part of the challenge is to share your results with me. Privately of course. (I am bound by privacy laws.) Are you a BA/PAW? If so, how did you do it? I want to learn from you. Was/is it diligent saving? An unexpected inheritance? What? Maybe you’re an IA/UAW. Even if you are, I still want you to share your results. Let me know why you think you might not be doing as well as you could. Do you have a plan to improve? Let me know what it is. I want to learn from you as well.

And I’d like to share, those of you who allow me, your story with others as well. Anonymously of course (Again, I am bound by privacy laws). Let’s all learn from each other. Just email me at and in your own words let me know about your financial successes and your financial hiccups. I may write a future post, with names, dates and specifics appropriately altered, with lessons learned from what you tell me. Maybe some of you might share one great tip or two which can posted on Twitter or Facebook. My vision is that everyone can be better off financially. What better way to learn from each others’ “goods, bads and uglies”.

But a few ground rules should be presented:

  1. If you do decide to share, all I really need to know is what category on the Brick Wealth Ratio you fall into – IA/UAW, AAW or BA/PAW - and how you got there. Minute details are unnecessary for me or the rest of us to learn from one another.

  2. When calculating your net worth figure, anything inside your house doesn’t count as an asset. No furniture, no jewelry, not even your car. Personal financial assets, business assets and real estate are all that count, however,

  3. ALL your liabilities count. For instance, although your car doesn’t count as an asset, the debt on that car does.

  4. If your income has greatly fluctuated over the last few years, use the average of say the last three.

That’s it. Payday Challenge #4 - Know Your Number and share your story.

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About Brick Financial Management, LLC

Blogged by Brick Financial

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Short Hills, NJ 07078
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure


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