From Bad to Worse: America’s Racial Wealth Gap

A new study out today from Brandeis University’s Institute for Assets and Social Policy (IASP) shows that the wealth gap between black and white Americans has roughly tripled since the 1980s. Let that sink in for a moment. In 1984, the gap in median wealth between black and white Americans amounted to roughly $85,000. (Remember that wealth is a measure of everything a person owns, minus what they owe. This figure represents the gap, rather than total holdings of either group.) By 2009, the black-white wealth gap had soared to $236,500. To put that in perspective, the median price of a house in 2009 was $216,700, according to Census figures.

As Michael Fletcher writes for the Washington Post, we’ve seen important progress toward racial equality over the past quarter century or so: more black Americans are graduating from college and entering into positions of public office, for example. But despite these markers of progress in place, the racial wealth gap is persistent and widening.

As the Wall Street Journal explains, the IASP study makes an important contribution to answering why this is so. By studying a large set of households over a 25 year period, IASP researchers can show which factors contribute most to the gap. Since a home is typically the largest item on a family’s balance sheet, homeownership can be a key driver of inequality. Specifically, the number of years a family owned its home explains nearly “30% of the difference in the relative growth in wealth between white and black families.” As Reid Cramer told Michael Fletcher, “If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term.”

So what constitutes right and responsible? As Cramer outlined in a piece for the Washington Monthly in last month’s issue, affordable and non-predatory mortgage products may be the key to safe and sustainable homeownership for Americans of color and lower-income people of all races. Similarly, IASP highlights fair housing and lending policies as critical ways to ensure equal opportunity in homeownership for black Americans. Persistent residential segregation creates neighborhoods that are primarily home to people of just one race: for predominantly black neighborhoods, this imposes “a forced ceiling on home equity for African-Americans who own homes in non-white neighborhoods.”   

With almost 30 percent of the racial wealth gap attributable to gaps in homeownership and lower home equity, what explains that remaining 70 percent? The IASP study has identified several other factors that, when combined with homeownership, explain a full two-thirds of the gap. The graph below, modified from Figure 2 of IASP’s study, shows the factors contributing to the gap.

As depicted above, 20% of the gap can be attributed to disparities in family income. When added together, racially divergent experiences with unemployment, college education, and inheritances received from family members explained an additional 19% of the gap. As Tom Shapiro, author of the study and IASP director explains, “what these particular factors provide is compelling evidence that various government and institutional policies […] shape where we live, where we learn and where we work [and] propel the large majority of the widening racial wealth gap.”

The IASP study also makes an important contribution in reference an ongoing policy conversation about the role marriage plays in reducing poverty and inequality. IASP researchers measured the impact marriage had on family wealth over the 25 year study period. While marriage significantly increased wealth holdings for white families by about $75,000, there was no statistically significant impact on black families’ wealth due to marriage. While increasing interracial marriage may mitigate this disparity somewhat, the fact remains that an overwhelming majority of Americans marry a person of the same race (in 2010 the Census found that 90% of heterosexual married couples belonged to the same race).

In a webinar convened today by the Closing the Racial Wealth Gap Initiative, PolicyLink and IASP, experts reviewed the IASP study and weighed in on additional ways to address wealth disparities. Shapiro explained how public policies have created and sustained the racial wealth gap but can be effectively redesigned to play a role in closing that gap. For example, Shapiro and colleagues point to the practice of redlining during the mid-twentieth century as a driver of disparities in homeownership rates and wealth accumulation, as well as residential segregation. Federal agencies and private industry alike participated in racial discrimination by refusing to give mortgages to black families or offering loans on less favorable terms than those given to white borrowers. Although the 1968 Fair Housing Act made this practice illegal, aspiring homeowners of color in the lead up to the recent Great Recession were "consistently more likely to receive high-interest risky loan products, even after accounting for income and credit scores." Thus, while progress has been made with fair housing and lending, much work remains to ensure that all Americans have access to wealth-building strategies such as homeownership.

Over a lifetime and across generations, various forms of discrimination add up to generate significant inequality and threaten the future of the American dream narrative (that anyone of modest means can rise to the middle class with hard work). The generational impacts of both historical and contemporary forms of discrimination are clear: with less potential to transfer wealth to future generations, black Americans (and other historically low-wealth groups) will continue to struggle to overcome these structural disparities. IASP’s study makes an important impact by coupling rigorous statistical analysis with clearly-articulated policy options to address the racial wealth gap.