Thursday, July 28, 2011

Economic News About Wealth

The Pew Research Center has published the results from a new study which looks at the impact of the current recession on the wealth levels of majority and minority households:
The recession, which included a collapse in home values and high unemployment, took the greatest toll on minority wealth. From 2005 to 2009, median wealth fell by 66 percent among Hispanic households and 53 percent among blacks, compared with 16 percent among whites. The losses left Hispanic and black wealth at their lowest levels in at least 25 years.
“It’s not so much that the wealthy were busy getting richer – it’s that they slipped back less than those at the other end of the ladder,” says Rakesh Kochhar, a demographer and co-author of the analysis released Tuesday by the Pew Research Center.

In 2009, the median net worth of white households was $113,149, compared with $6,325 for Hispanics and $5,677 for blacks. That gap is about twice as large as the 1 to 10 white-to-minority wealth ratio that prevailed during the two decades before the recession.
The reason? It is probably partly due to the greater incidence of unemployment in the minority populations but mostly due to this:
The housing crash that began in 2006 reduced home values for most American homeowners, but it hit minority families particularly hard because more of their wealth is tied to their homes.
If the value of your house drops by 40%, and all your wealth is tied up in its equity, what happens to your wealth?

This graph shows the impact of the recession on the net wealth levels of different ethnic or racial groups:

The New York Times article suggests that the Latinos suffered the largest drop in net wealth levels because they are concentrated in areas of the country where the housing market collapse was the hardest.

This may also explain the large drop in the Asian households' net wealth, given that this is a group which has not suffered from equally high unemployment rates or low average incomes as the African-American or Latino populations. Another reason for the larger effect on Latinos and Asians might come from more recent immigration status. Immigrants mostly enter without much personal wealth, and to gather it takes time.

But neither of these arguments explains why the median wealth levels of whites are twenty times those of African-Americans. We should be very concerned about these differences. Likewise, the housing markets should get more presidential attention than the deficits.