The 2008 housing crisis, nearly took down the entire U.S financial system and global economy. Millions of families were impacted across the United States but the most dramatic impact was felt by black and Hispanic families. A report from the St.Louis Federal Reserve attributes this to two key factors
- Homeowners equity (what your house is worth minus your mortgage) represented a disproportionate level of Black and Hispanic wealth prior to the housing crash.
- Housing prices in predominately Black and Hispanic neighborhoods were hit the hardest.
As shown in Figure 1, prior to the housing market crash homeowners equity represented more than 50% of Black and Hispanic wealth, compared to around 30% Asian families and 25% for White families. Having more than half of their wealth tied up in their home, left Black and Hispanic families particularly vulnerable when the housing market began to tank in 2008–2009.
The loss in values and in many cases the loss of a home to foreclosure dropped Home Equity to about 40% of total wealth for Black and Hispanic households by 2013. Unfortunately, this is not the case that Black and Hispanic households were able to diversify their wealth into other assets, it is that their home values and foreclosure rates were disproportionately high.
The truly sad thing to consider is that prior to the financial collapse in 2008 Black and Hispanic households were closing beginning to close the wealth gap with white households.
Figure 6 below shows the year over year increase in wealth adjusted for inflation from 1989 to 2013. This does not show total wealth but it shows how wealth has increased relative to the year before.
In all but one year between 1989 and 2017, Hispanic households were increasing their wealth at a higher rate than any other racial group, including White households. With the exception of the late 90’s Black households were increasing their wealth at the same or higher rate than White households.
Then in 2007 all of that changes course. Hispanic and Black households see a dramatic drop in their wealth. While White and Asian wealth remained relatively flat. Again this can be attributed to the disproportionate concentration of Black and Hispanic wealth in their homes. When the market turned down, so did their wealth.
Making the issue of declining home prices even more severe was the fact that Black and Hispanic households were also hit the hardest by unemployment. By 2010 Black unemployment had reached 16.8%, Hispanic unemployment had reached 12.9% and while White unemployment never cracked 10%. This played a major factor in the disproportionate number of black and Hispanic households who lost their homes due to foreclosure.
One of the lessons from the financial crisis is that as a society we need to do away with the stigma that renting is somehow “bad”. Especially for low-income households where it purchasing a house takes up so much of your money that you are left with very little to invest in other assets.
The main problem with having a high proportion of your wealth tied up in your house is that it is extremely difficult to access that equity when you need it. To access the equity in your home you have two options:
- Open a Home Equity Line of Credit/ Refinance or
- Sell your home
When home prices went in the tank and unemployment spiked both of these options were taken off the table. The banks were NOT lending money in the aftermath of the crash and so many people’s homes were left underwater (they owed more on their mortgage than they could sell it for). This is one of the factors that has dramatically increased the racial wealth gap 10 years after the financial crisis.