The racial wealth gap perpetuates inequalities and prevents large swathes of American citizens from economic security and progress.

Homeownership can be a reliable way to build and pass on wealth within families. But, as discussed at our Closing the Gap: Building Black Dollars event, this may not be the case for all Americans.

We wanted to explore the issue further. So, we asked a financial advisor, a behavior researcher, and a stock market analyst for their take on this question: When it comes to the racial wealth gap, is property an effective way to create wealth? the wealth ?

Here are their responses, edited for length and clarity.

Brian Thompson, CFP, financial and tax advisor:

Homeownership has many benefits … but it’s not perfect.

In the United States, families have long accumulated intergenerational wealth through homeownership. The United States government, through tax policy and other incentive programs, heavily subsidizes the purchase of homes. But it does so in a way that has historically excluded minorities.

For example, redlining was a central feature of US housing law. Even now that redlining is illegal, homeowners still face blatant and covert discrimination when they get mortgages and sell their homes.

The homeownership rate for African Americans is around 42% to 45%. That’s about what it was in the 1970s — and down significantly from the highs of the 1990s. On the other hand, white homeownership hit a record high in 2020 at 75. %. Additionally, African Americans tend to take on more debt for lower value homes and as a result they benefit less from home appreciation than white homeowners.

Finally, a recent study found that the gap between appraised home values ​​in predominantly white neighborhoods versus comparable homes in predominantly black and Latino communities nearly doubled between 1980 and 2015.

While sweeping legislative and policy changes can help reverse the impact of decades of discriminatory federal guidelines, homeownership alone cannot resolve the racial wealth gap. Indeed, according to the Brookings Institute, depending on homeownership itself can even to broaden racial disparities.

Home ownership has many advantages. It forces families to save, it allows them to take advantage of the wealth creation potential of leverage, and it’s relatively inexpensive since federal programs subsidize borrowing.

But it’s not perfect.

A home is a large, undiversified investment that is expensive to buy and sell, and whose value fluctuates with market conditions. Plus, you tend to need a lot of capital for down payment, closing costs, and other move-in costs. Minority groups are particularly vulnerable to these disadvantages as they face systematic discrimination in buying, selling and financing their homes.

Even if the government can implement the desired changes, it will likely take a long time for these changes to take effect. And if people of color concentrate their limited wealth in housing during this time, they can fall further and further behind.

As a result, black families may benefit more from other pathways with a somewhat lower barrier to entry for wealth accumulation, including investment (baby bonds) and entrepreneurship, which may yield more dividends and close the wealth gap faster.

Sarah Newcomb, Director of Behavioral Sciences at Morningstar:

“For many, the psychological value of property is an intangible asset of great personal value.

One-third of America’s middle class wealth is held in real estate, according to the Federal Reserve, and for many, it has been a stable wealth building tool for generations. However, the math is somewhat different for white and non-white homebuyers.

In 2019, the Brookings Institute estimated that “owner-occupied homes in black neighborhoods are undervalued by $ 48,000 per home on average, representing $ 156 billion in cumulative losses.”

Racism is a well-documented economic drain, and the cost is paid by non-white homeowners. In the future, as populations and neighborhoods change color, will this trend change as well? May be. Until this is the case, non-white homebuyers will continue to have a more complex calculation to deal with than most white investors need to consider.

All real estate investors should be aware of the risks and variables associated with land and property as an asset class: geography, flood zones, local infrastructure, weather, schools, taxes, etc. And, if you are considering a long-term investment, you should also think about how these variables are likely to change over the course of several decades.

In addition to these variables, non-white investors must also take into account the effect of bias – both against themselves and against their neighbors – on the current and potential value of the asset. They also need to consider racial biases in mortgage lending – non-white applicants are more likely to be charged higher interest rates, resulting in more money out of pocket overall.

Finally, I want to mention that the benefits of home ownership extend beyond the bottom line. Ownership is a form of status and gives weight to one’s position in a community. For many, the psychological value of property is an intangible asset of great personal value. To have a piece of land for oneself is a goal of life for some and can represent a socio-economic progress through the generations.

But, if you are a non-white investor considering real estate, I wouldn’t rule out bias and neighborhood effects when estimating the future value of the asset. Your assets should mature on your schedule and not overly depend on the timeline of social progress.

Brian Bernard, CFA, CPA, Director of Industrial Equity Research for Morningstar:

Home ownership is a central element in building up household wealth.

On the one hand, it allows investors to accumulate equity in an asset class which, apart from the abnormal financial crisis, has generally appreciated over time. Second, homeownership can reduce household tax liability and help households build a strong credit history.

Nationally, real estate values ​​of newly built and existing residential homes have risen 4% to 6% over the past 30, 20 and 10 years, regardless of the race of the owner, according to data from the Federal Reserve Board. and the US Census Bureau. That said, house price trends may differ across regions and metropolitan areas due to variations in supply and demand dynamics (e.g. population and employment growth) and d other factors.

– source: Board of Governors of the US Federal Reserve, US Census Bureau, Morningstar.

Regardless of race, real estate is one of the most important assets held on aggregate household balance sheets. In fact, according to the Federal Reserve and the US Census Bureau, real estate accounts for a greater proportion of aggregate assets for black and Hispanic households (28% and 44%, respectively) compared to white households (22%), primarily because the former have less wealth tied to stocks, mutual funds and other investment vehicles.

According to the US Federal Reserve’s Consumer Finances Survey, the median net worth of white households was $ 188,000 in 2019, compared to just $ 36,000 for Hispanic households and $ 24,000 for black households. Based on the data, much of this wealth gap can be explained by low homeownership rates and declining retirement accounts and investments among black and Hispanic households compared to white households.

– source: US Census Bureau, Morningstar.

While many factors may account for the relatively low homeownership rate among black and Hispanic households, income inequality is a significant factor. For example, according to the Federal Reserve’s Survey of Consumer Finances (FCS), in 2019, the median income for white households was $ 69,000, compared to about $ 40,000 for black and Hispanic households.

Lower household income, along with fewer financial assets, make it more difficult for households to make a down payment and qualify for a mortgage. We believe these barriers have become even more insurmountable recently, given soaring house prices and deteriorating housing affordability. That said, the current rate of home price appreciation is unsustainable, in our view, and will likely moderate as housing supply increases and mortgage rates rise.

While homeownership is a stable vehicle for wealth creation for Americans of all races and ethnicities, structural barriers have made homeownership more difficult for minority households. While there is unlikely to be a quick fix to this deeply rooted problem, well-designed policies to tackle income inequality, increase the supply of affordable housing, and promote more equitable lending practices could. help alleviate this problem over time.