Homeowners' Equity (HOE)—the market value of residential real estate minus the value of home-secured debt—has long been the largest single component of wealth for Black and Latino families. On average during the last quarter century, HOE accounted for nearly half of Black and Latino wealth, compared to about a third for Asian and other families, and about a quarter for white families (see graph below). During peaks in 1989 and again around the recent financial crisis, HOE accounted for more than half of the wealth of the average Black and Latino family.
After 2007, large price declines and the loss of many homes through foreclosure and other distressed transactions reduced the 2013 wealth shares of HOE to 40 and 42 percent for Black and Latino families, respectively. For whites, HOE declined to 25 percent of the average total wealth in 2013, while HOE accounted for 32 percent of the average wealth of other families (primarily Asian).
Despite its prominent role in Black and Latino balance sheets, HOE contributed less than other assets to wealth accumulation during the 1989 to 2013 time span covered by the Survey of Consumer Finances. The same was true for white and other families, who benefited from proportionately larger investments in non-housing assets.
The drag exerted by poorly performing housing wealth on total wealth accumulation is starkly illuminated when comparing major racial and ethnic groups. During the 1989 to 2013 period, the average annual increases in the inflation-adjusted value of homeowners‘ equity and of all other asset types were as follows:
HOE wealth increased at only .5 percent per year after inflation among Hispanic families and actually declined, on average, by 0.4 percent per year among Black families. White and other families, by way of contrast, experienced significantly higher average rates of HOE increase.
Excluding HOE, rates of wealth accumulation were comparable among white, Black, and Hispanic families (although families in the other category achieved a significantly higher average gain). The final column reveals that it is the heavy concentration of Black and Latino wealth in housing, and HOE's poor average returns, that caused their average overall wealth gains to lag significantly behind those of whites.
The relatively low cumulative increase in wealth between 1989 and 2013 can be attributed to large declines after 2007, which is associated with the financial crisis and Great Recession. In fact, by 2004, Latino and Black families had experienced greater average overall wealth increases than white and other families since 1989. The devastating collapse of housing markets after 2007 hit Black and Latino families particularly hard because so much of their wealth was tied up in housing.
Drawing lessons from the last quarter century, our proposed three principles of sound financial management for families of color are:
1) Maintain adequate liquidity
2) Diversify assets broadly
3) Keep debt under control.
Homeownership can make following all three of these principles more difficult, especially for economically and financially vulnerable families. Concentration of assets in housing has contributed to lower and more volatile wealth accumulation for average Black and Latino families over time and therefore should be avoided.
The views expressed here are mine alone and are not those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
(All data are from the Federal Reserve Board’s Survey of Consumer Finances, a large triennial nationally representative sample of households. The racial and ethnic categories used throughout this article are as follows: 1) non-Hispanic white, 2) non-Hispanic African-American or black, 3) Hispanic of any race and 4) other, which includes people of Asian heritage as well as Native Americans, Pacific Islanders, Native Hawaiians, and other groups not included elsewhere.)
Image credit: Richard Cawood, via flickr, CC BY-NC 2.0