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ISSUE 5 | JULY 2017 F EDE RAL R E S E RVE BANK ST. LOU IS HOUSING MARKET PERSPECTIVES On the Level with Bill Emmons Bill Emmons is an assistant vice president and economist at the Federal Reserve Bank of St. Louis and the senior economic adviser for the Bank’s Center for Household Financial Stability. Homeownership and the Racial Wealth Divide A version of this article appeared earlier in Shelterforce, a blog of the National Housing Institute.1 FIGURE 1 Average Share of Homeowners’ Equity in Net Worth by Racial or Ethnic Group H 60 50 40 Percent omeowners‘ equity (HOE)—the market value of residential real estate minus the value of homesecured debt—has long been the single largest component of wealth for black and Latino families.2 On average during the past quartercentury, HOE accounted for nearly half of black and Latino families‘ wealth, compared with roughly a third for Asian or other families and about a quarter for white families (Figure 1).3 During peaks in 1989 and around the financial crisis starting in 2007, 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 or other distressed transactions served to reduce the 2013 share of wealth attributed to HOE to 40 percent for black families and to 42 percent for Latino families. This same share declined to 25 percent for white families and to 32 percent for Asian or other (henceforth, ”Asian“) families. Despite its prominent role in black and Latino families‘ balance sheets, 30 20 10 Black (average = 46%) Hispanic (average = 43%) Asian or other (average = 32%) White non-Hispanic (average = 27%) 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). FEDERAL RESERVE BANK OF ST. LOUIS HOE contributed less than other assets to wealth accumulation during the 1989-2013 period covered by the Federal Reserve’s latest Survey of Consumer Finances (Figures 2 and 3). The same was true for the balance sheets of Asian and white families (Figures 4 and 5), which benefited from much larger investments in nonhousing assets. 1 The drag exerted by poorly performing housing assets on total wealth accumulation is starkly illuminated when comparing the major racial and ethnic groups. The table on Page 3 shows the average annual increase in the inflation-adjusted value of homeowners‘ equity and all other asset types for each group during the 1989-2013 period. FIGURE 2 FIGURE 3 Change in Average Wealth: Homeownership (HOE) vs. Other Assets for Blacks Change in Average Wealth: Homeownership (HOE) vs. Other Assets for Hispanics 300 250 300 Average black wealth, excluding HOE Average homeowners’ equity for blacks 250 200 Index Index 200 150 100 50 50 0 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 1989 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). NOTE: The FIGURE 4 figure shows cumulative changes in the indexes (1989=100), adjusted for inflation. 250 1992 1995 1998 2001 2004 2007 2010 2013 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). NOTE: The FIGURE 5 figure shows cumulative changes in the indexes (1989=100), adjusted for inflation. Change in Average Wealth: Homeownership (HOE) FEDERAL RESERVE BANK OF ST. LOUIS vs. Other Assets for Asians Change in Average Wealth: Homeownership (HOE) FEDERAL RESERVE BANK OF ST. LOUIS vs. Other Assets for Whites 300 Average Asian (or other) wealth, excluding HOE Average homeowners’ equity for Asians (or other) 250 Average white non-Hispanic wealth, excluding HOE Average homeowners’ equity for non-Hispanic whites 200 Index 200 Index 150 100 300 Average Hispanic wealth, excluding HOE Average homeowners’ equity for Hispanics 150 150 100 100 50 50 0 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 1989 1992 1995 1998 2001 2004 2007 2010 2013 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). NOTE: The figureReserve shows cumulative changes in the indexes (1989=100), NOTE: The figure shows cumulative changes in the indexes (1989=100), adjusted SOURCE: Federal Board Survey of Consumer Finances (2013). adjusted for inflation. for inflation. NOTE: The figures above show cumulative changes in the indexes (1989=100), adjusted for inflation. FEDERAL RESERVE BANK OF ST. LOUIS As the table shows, the inflationadjusted value of HOE increased by only 0.5 percent per year for Hispanic families and actually declined, on average, by 0.4 percent per year for black families. White and Asian families, by contrast, saw significant increases. FEDERAL RESERVE BANK OF ST. LOUIS Excluding HOE, rates of wealth accumulation were comparable among white, black and Hispanic families, while Asian families benefited from a significantly higher average gain. The final column indicates that the heavy concentration of black and Latino families‘ wealth in housing, and HOE‘s 2 poor average returns, contributed to the significant lag in average overall wealth gains for these groups when compared with white and Asian families. Figure 6 shows cumulative percentage increases in total average wealth during the 1989-2013 period. The figure makes clear that the relatively low cumulative increases in long-run wealth for black and Latino families resulted from large declines in asset values after 2007, when the financial crisis and then the Great Recession took their toll. In contrast, from 1989 to 2004, Latino and black families experienced greater average overall wealth gains than white and Asian families. 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 past quarter-century, our research proposes three principles for sound financial management: Average Annual Percent Change in Inflation-adjusted Asset Values, 1989-2013 ENDNOTES 1 See http://shelterforce.org/2016/11/05/ homeownership-is-a-culprit-in-the-racial-wealthdivide. 2 See Figures 6 and 7 in William R. Emmons and Bryan J. Noeth, “Economic Vulnerability and Financial Fragility,” Federal Reserve Bank of St. Louis Review, September/October 2013, Vol. 95, No. 5, pp. 361-88, https://files.stlouisfed.org/files/htdocs/ publications/review/13/09/Emmons.pdf. 3 All data are from the Federal Reserve Board’s most recent (2013) Survey of Consumer Finances, a triennial, nationally representative sample of households. See https://www.federalreserve. gov/econresdata/scf/scfindex.htm. 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) Asian or other, which includes people of Asian heritage as well as Native Americans, Pacific Islanders, Native Hawaiians and other groups not included elsewhere. 4 See William R. Emmons and Bryan J. Noeth, The Demographics of Wealth, Federal Reserve Bank of St. Louis, 2015, https://www.stlouisfed.org/ household-financial-stability/the-demographics-ofwealth. -0.4% 2.3% Total wealth (all assets less all liabilities) 1.0% Hispanic 0.5 2.1 1.3 Asian or other 2.5 2.9 2.8 White non-Hispanic 1.2 2.3 2.0 All families 1.0 2.1 1.8 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). FIGURE 6 Change in Average Total Wealth 300 250 2. Diversify assets broadly. 200 Index Homeownership can make following these three tenets more difficult, especially for economically and financially vulnerable families. Indeed, our research suggests that families that concentrate their wealth in housing tend to accumulate less wealth on average over time. All other assets less liabilities, excluding HOE Black 1. Maintain adequate liquidity. 3. Keep debt under control.4 Homeowners’ equity (HOE) 150 100 50 0 Average black wealth Average Asian or other wealth 1989 1992 1995 1998 Average Hispanic wealth Average white non-Hispanic wealth 2001 2004 2007 2010 2013 SOURCE: Federal Reserve Board Survey of Consumer Finances (2013). NOTE: The figure shows cumulative changes in the indexes (1989=100), adjusted for inflation. FEDERAL RESERVE BANK OF ST. LOUIS The St. Louis Fed’s Housing Market Conditions Report Housing Market Perspectives is published by the Community Development department at the Federal Reserve Bank of St. Louis as part of its quarterly Housing Market Conditions report. The report provides an overview of housing market conditions for the U.S. and for the seven states that comprise the Federal Reserve’s Eighth District, as well as for the District’s four main metro areas: St. Louis; Little Rock, Ark.; Louisville, Ky.; and Memphis, Tenn. See stlouisfed.org/hmc. 3
