March 21, 2013
White-Black Wealth Gap Nearly Triples
Over the past 25 years, the difference in wealth held by white and black households in the United States has nearly tripled, to $236,500.
In December, Squared Away wrote about the difficulty that black families have in trying to accumulate wealth so they can pass it on to their children. New research out of Brandeis University’s Institute on Assets and Social Policy now finds that the gap between the median net worth for white and black households has widened to a chasm, as blacks have fallen farther behind.
The study also quantified the reasons for the widening gap and found that the difficulty of building up housing equity is the largest factor.
A house is usually the single largest asset owned by middle-class American families. But starkly different homeownership patterns between blacks and whites – ownership rates are lower for blacks, who also own their homes for fewer years than whites – accounted for 27 percent of the increase in the wealth gap.
Housing’s impact has been “incredibly large” and is the “key driver” of the growing black-white wealth gap, said Thomas Shapiro, the institute’s director. “It’s part of the disadvantage that keeps working its way through the life course” from one generation of a black family to the next, he said. …Learn More
March 12, 2013
Feeling Poorer? Blame the House!
The American psyche gets a lot of credit for fueling the boom in U.S. home prices, which ended in 2006. As houses increased in value, homeowners felt richer, and they spent more. Similarly, falling house prices led to declines in consumer spending as households found themselves poorer and less able to access credit, according to a new paper, “Wealth Effects Revisited: 1975-2012,” by economists Karl Case, the late John Quigley and Robert Shiller.
In this interview, Case explains this “wealth effect.”
Q: Why were our spending decisions influenced by our psychology during the housing boom?
Case: The increase in house prices was like magic. They went from the 1950s until 2006 without ever falling nationally. The numbers are astonishing. If you look at the Federal Reserve’s Flow of Funds Accounts, the value of the owner-occupied housing stock in the United States increased from $14 trillion to $24 trillion. All of a sudden the collective balance sheet of U.S. households had $10 trillion worth of assets that it didn’t have before. That’s a very big number.
The first thing I asked myself is, How did I behave? I bought a house in Wellesley [Massachusetts] for $56,000 in 1976. When I sold it in 1991, it was a $240,000 asset. I know my behavior changed. I was in my 40s, and I found myself with a quarter million dollars that I didn’t know I had. It made me feel wealthier, and I spent more and saved less than I otherwise would have. Home equity loans and second mortgages made it possible for homeowners to withdraw their newly acquired equity to finance a higher level of spending and/or a new or bigger home.
Q: How do we decide we’re feeling richer?
Case: Household wealth is made of many things: houses, cars, and financial assets. The value of any asset, including housing, is determined by what people are willing to pay for it. What determines that? Our expectation of whether it will go up in the future. If you have a house I think is going to go up 10 percent per year, I’m willing to pay more for it than if I think it’s not going up at all. That’s how psychology drives the housing market.
In annual surveys for another paper, we asked 5,000 people going forward 10 years, what do you expect the average annual increase to be in the value of your house? They said 8-10-12 percent per year. They were feeling better because their house was worth more. That leads to more spending.
Q: Is it fair to say the housing market was one of the primary influences on the economy?
Case: Absolutely. Our finding has been very controversial. Some people say housing’s wealth effect doesn’t exist. Our own earlier work suggested that it works when the housing market is on the way up but not on the way down. We now have evidence that it works in both directions. …Learn More
December 11, 2012
Black Families Struggle to Build Wealth
It is extremely difficult for black Americans to accumulate wealth they can pass on to their children.
Getting to the heart of this concern is new research by the Urban Institute. The Washington think tank found that while blacks excel at converting the gifts and inheritances they receive into even more wealth, the size and frequency of these bequests are much smaller than for whites, perpetuating a wealth gap that has existed since emancipation.
“In the news, you hear about the racial income gap, but the racial wealth gap is so much larger, and it’s not improving,” said Signe-Mary McKernan, a senior fellow at the Urban Institute and co-author of the new study. Smaller inheritances and gifts in African-American families “are hindering their opportunity and wealth accumulation,” she said, about her findings.
Median wealth for black families is $18,181 – white family wealth is $122,927, and Hispanic wealth is $33,619.
But the real question is, why is white wealth seven times larger than black wealth? The researchers found that blacks are five times less likely to receive family bequests than are whites, and their inheritances are $5,013 smaller.
McKernan’s research employed standard statistical methods by holding factors such as income and education constant in order to highlight the racial aspect of differences in wealth.
But Lester Spence, a political science professor at Johns Hopkins University who sometimes conducts statistical analysis in his research, said such analysis fails to fully capture the significant impact of factors such as the social and cultural barriers facing black Americans. …Learn More
October 18, 2012
College Educated Take On More Debt
Americans with college degrees are more likely to overuse their credit cards, home equity loans and other debts than are people who didn’t attend college, according to research in the latest International Journal of Consumer Studies.
“I was really expecting the reverse,” Sherman Hanna, a professor of consumer sciences at Ohio State University in Columbus, said about the results of his research, conducted in conjunction with Ewha Womans University in Seoul and the University of Georgia in Athens.
The study also reveals the increasing fragility of Americans’ finances, particularly in the run-up to the 2008 financial crisis when overall debt levels surged amid what Hanna called a “democratization of credit” that made it easier – critics said too easy – to borrow.
The percent of all U.S. households with monthly debt payments exceeding 40 percent of their pretax income rose from 18 percent in 1992 to 27 percent in 2007. (Consumers have slashed their debt during the recent recession.)
Based on education levels, Americans with a bachelor’s or graduate degree had more than a 32 percent likelihood of being heavily in debt. That compared with 24.5 percent for people who graduated from high school and did not attend college, according to the study, which tracked U.S. households from 1992 through 2007. To make their comparison, the researchers controlled for the effect of incomes.
The researchers designated households in their sample as being heavily in debt if their monthly loan payments and other debt obligations exceeded 40 percent of their pretax income. That is a high share of income to devote every month to paying off loans, rather than buying groceries, saving for retirement, or utilities…Learn More
April 5, 2012
The Family That Dines Together…
New research adds a dash of spice to our understanding of how people handle their personal financial matters: families who dine together grow wealthy together.
Three professors at the University of Georgia have discovered that families who commit to gather regularly around the dinner table – or, presumably, dine out or cook together – are better prepared financially and will accumulate more wealth faster.
As with any statistical analysis, their research can’t prove cause and effect. Is it that dining together causes wealth to go up, or is that families who know how to handle their finances also tend to be the type of people who enjoy meals together?…Learn More
March 29, 2012
Mortgage Refi Dilemma: 15 or 30 years?
My mortgage broker is a patient man.
I kept changing my mind, because this refinancing was about so much more than whether to go with a 15- or a 30-year fixed rate. Now that the loan is about to close, I worry that I made the wrong decision.
As a baby boomer, all financial decisions suddenly spin around retirement. Many boomers now own their homes free and clear. I am not one of them, and it seems critical to get this refinancing right, since mortgage interest rates may not hit these historic lows again for a long time. For this reason, and because house prices have plummeted, the 15-30 dilemma may prove important for cash-strapped, first-time homebuyers too.
“I don’t think [rates] are going to race up in the next 6 months, or even year and a half, but things are definitely headed upwards,” predicted Susan Honig, owner of Veritana Financial Planning Inc. in Burbank, Calif. “And after that I think rates are going to fly.” …Learn More
February 23, 2012
For Many Elderly, Little Left as Life Ends
About half of the elderly living alone and one-third of elderly couples have less than $10,000 left in their savings and investment accounts just before they leave this world.
These grim statistics may be a more accurate gauge of retirement survival than the balances Americans have accumulated as they enter retirement, a pursuit that pre-retirees and the financial-services industry tend to focus on.
To determine where retirees wind up financially, economists James Poterba at the Massachusetts Institute of Technology, Steven Venti at Dartmouth College, and David Wise at Harvard University crunched a mass of data. Tracking a nationally representative sample of middle-aged and older Americans, they tabulated the financial assets held by elderly couples and the elderly living alone as they approached retirement, retired and aged, and when they were last observed in the sample.
“What we take away from this is that a significant number of households have a very small cushion if they encounter any kind of financial need,” Poterba said in a telephone interview last week, referring to a new working paper, “Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts.”
The following is a small slice of what the researchers found in the last years before the elderly died…Learn More