Wealth compounds itself over generations. Not having access to wealth, or even income for hundreds of years puts you at a significant structural disadvantage. The legacy of slavery connects to hundreds of years of economic exclusion which continued long after emancipation. During the Civil War, General Sherman’s Field Order No.15 sought to divide nearly 400,000 acres of former plantation land on the coast of South Carolina and Georgia into forty acre parcels which would be granted to newly freed black families in Georgia. President Lincoln was assassinated before he could formally validate the wartime order. His successor Andrew Johnson, quickly reversed the order by confiscating the lands of freed blacks and returning them to the prior plantation owners in exchange for a “loyalty oath.”

This story reveals the importance of land — at that time, “forty acers and a mule,” today — a home in the suburbs. The American Dream means different things to anyone you ask, however a key hallmark of the American Dream is homeownership and financial freedom. Today racial property covenants may be extinct, but the damage has already been done. The reason why homeownership is so important is because it is the first step towards generational wealth. Real estate represents 2/3 of the average American family’s net worth. Real estate also does a very good job of slowly and very consistently increasing in value. The homeownership rate for black families today is 44% compared to 73% for white families. Compound interest works best when you start with lots of capital, however lack of capital breeds tremendous pain.

Photo by Morgan Housel on Unsplash

We see this pain in the working poor of 2020 who are disproportionately Black and Hispanic. Many of the retail and lower wage service sector job cuts brought on by the Pandemic will be permanent. Lack of capital breeds pain because you’re left vulnerable. A job lost in the family quickly leads to unpaid rent and a plethora of late fees and interest, this balloons into high interest debt that will sink credit scores creating a cycle of pain. This financial trap is a painful reality for many families who were already on the edge. It’s no secret that Black and Hispanic unemployment is significantly higher than white unemployment particularly during recessions.

Minorities are disproportionately hit the hardest during recessions and are the slowest to recover. The wealth gap between whites and blacks is bleak. According to the 2019 Survey of Consumer Finances, the median net worth of a white American family is $188,200. However, the median net worth of a black American family is $24,100, more than seven times less. Remember median means middle, so half of all American black families have a net worth of less than $24,100 based on that report.

Source: Federal Reserve Board, 2019 Survey of Consumer Finances.

The wealth gap is so big, it may never be fully closed because money compounds, when you have little or none, you don’t participate in bull markets. Racial bias is so intrenched into the fabric of American life that it effectively caps economic opportunity for minorities. The history of housing discrimination begins with the practice of Redlining. Prior to the Fair Housing Act of 1968, the Federal Housing Administration (created during the New Deal to guarantee first time home buyers mortgages) would only lend on properties in primarily white neighborhoods. Before 1968, 98% of federally backed mortgages were given to whites. During that time, developers instituted racial covenants in property titles, ensuring that blacks were forbidden from buying property in certain neighborhoods.

The neighborhoods deemed “safe investments” by banks attracted more capital, creating a virtuous cycle of rising property values and continued development. Minority neighborhoods that were cut-off from mortgages slipped into poverty as property values lagged. Lower property values meant less school funding. There is a strong correlation between highly rated public schools and higher property values. American public schools are supposed to be “public,” but upon closer inspection, high property values serve as an effective financial barrier creating de facto school segregation that is still present today.

It’s still systemically harder for minorities to step into homeownership. Studies show that banks still discriminate against black borrowers on mortgages and auto loans. When compared to whites who have the same credit scores and financial credentials, black applicants are rejected at higher rates and are charged higher interest. Furthermore, a shocking report from ABC News shows the devastating impact racial bias still has on home appraisals. Being charged more for big-ticket items adds up. Not being able to buy real estate in the suburbs adds up. This past and present exclusion will continue de facto until the socioeconomic foundations behind systemic racism are addressed.

This wealth gap leaves minorities in urban areas vulnerable to gentrification and displacement. Gentrification happens when wealthy primarily white residents move into minority majority working class neighborhoods, driving up property values and changing the demographics and culture of whole neighborhoods through redevelopment. The long history of racial oppression has held back minorities from achieving financial success, and that manifests in today’s economic exclusion. Gentrification is redlining 2.0. Although not explicitly racial, gentrification carries on the legacy of redlining through economic displacement, maintaining neighborhood division by way of race.

Economic growth is awesome, however displacement is not. Minority displacement by way of gentrification is a symptom of a larger problem — the growing racial wealth gap.

The extreme racial wealth gap is undeniable evidence of the long term effects of systemic racism. The racial wealth gap is a huge problem for economic equity. Policy makers must take aggressive steps to address the merger of socioeconomic and racial inequality, otherwise minorities will remain economically disadvantaged and past oppression will become perpetual.

I enjoy breaking down financial and economic trends.

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