Race, Real Estate, and Retirement

Green seedlings with small house in soil on bright background

The Pew Research Center reports median net wealth in 2013 of households headed by African Americans was less than a tenth of net wealth of households headed by whites; $11,200 for black households and $144,200 for white households. This difference exists even when controlling for education and other demographic characteristics. The impact extends inter-generationally, with reduced opportunities for children and grandchildren in African-American families because of limited assets, and the implication that today’s racial disparities will continue into the future.

While brought to a halt by the 2008 recession, and not without their own limitations, two Republican-supported initiatives pointed in the right direction, and, appropriately modified, deserve resurrection today: First, extending household ownership – and I hasten to add focus needs to be on government supply restrictions rather than on stimulating demand. Secondly, allowing individuals ownership rights over some of the taxes they pay into Social Security, thereby allowing intergenerational transfer of residual principal.

First, extending household ownership. Home equity is the largest single source of wealth for most American households. According to the PRC report, homeownership among African-American households lags white ownership by almost 30 percent; 72 percent among white households to 43 percent for black households. This factor alone sustains significant disparities between median household wealth for white and black families.

After the 2008 bank crisis, however, aspiring to broaden home ownership raises fears of repeating the cause of the bank crisis and the subsequent recession. I suspect the crisis wasn’t caused by risky loans themselves, but was caused by inaccurate reporting of loans made to riskier borrowers, and therefore a failure to discount those loans sufficiently enough for purposes of investment and reselling. But no matter. I don’t advocate trying to increase demand for housing. Rather, the problem is government supply-side restrictions on housing.

The problem is an artificially-restricted supply of lower-cost homes, meaning less-affluent Americans have difficulty finding starter homes they can afford. Zoning and government-imposed fees restrict construction of lower-priced homes, thereby preventing access to home ownership for relatively less-affluent Americans. To be sure, discrimination in the form of Federal government-initiated “Redlining” also existed through the 1960s; a legacy that still impacts communities. Nonetheless, government supply restrictions continue even today, with largely (but not entirely) unintended consequences.

The effects are both direct and indirect. The direct effect is zoning asymmetrically restricts construction of smaller, less-expensive homes relative to larger, more expensive ones. Affluent folk are usually the ones who want to exclude small, inexpensive homes from their neighborhoods. Less affluent folk typically don’t clamor to protect the “character” of their neighborhoods by excluding larger, more-expensive houses. Further, building fees of all sorts, even if scaled to the cost of the house, have a regressive impact on less-affluent Americans given the greater proportion of lower incomes that need go to pay for necessities relative to the proportion of incomes of more-affluent Americans.

Secondly, even without direct restriction of smaller, less-expensive houses, limitations on growth, particularly in larger cities, artificially restricts supply, thereby increasing prices for the stock of existing houses. Simply allowing the supply of housing to increase by reducing building constraints, even if only replicating extant housing sizes, would shift the supply curve outward, decreasing price overall.

To be sure, there is a cost to relaxing zoning restrictions and reducing construction fees: housing subdivisions would no longer be able to maintain their character and homogeneity as they do now. There would be more clutter with smaller lots and smaller houses, and neighborhoods would more likely be a heterogeneous mix of large and small houses, rich and poor households. This is why local elites, whether Democrat or Republican, Progressive or conservative, do not usually push for reform of local property regulation, except when reform imposes additional restrictions. Doing so would threaten to change the existing character of their neighborhoods. Further, currently, homeowners in many locales control the political and legal means to induce scarcity for existing homes – their homes – thereby maintaining or increasing their prices relative to less-regulated markets.

Home equity is the most significant source of household wealth for most American families. Retirements funds are another important source of household wealth. A second step that would likely increase the net median wealth of African American and other households would be to allow Americans to direct some portion of their social security taxes into privatized accounts, allowing individuals could pass on to their heirs.

The recession of 2008 extinguished most talk of privatizing social security; discussion hasn’t ramped up much despite the huge run up in the market since its lows. Yet even small allowances hold out the promise of disproportionately helping less affluent households to build wealth: A savings rate of $25 a month, assuming a modest annual return of five percent, over a 35-year career, would by itself generate over two and a half times the current median net wealth of African-American households. To be sure, retirees may need or want to use some or all of the principal for retirement expenses. But even having access to a lump of capital after retirement can provide intergenerational breathing room unavailable given the annuity-type feature of social security.

If indeed the insight of Thomas Piketty’s book, Capital in the Twenty-First Century, is correct, and return on capital is in the long-run greater than the return on other factors, a sensible response would be to seek to broaden capital ownership so that less affluent families too could take advantage of capital’s higher rate of return.

Of these two policies, I suspect reform in local housing rules and regulations promises the greater impact increasing African-American median household wealth. But it would take a broad, devoted political effort to reform local policies nationwide. (Although state governments generally hold significant authority over cities.) There is, however, no obvious constituency for the necessary reforms given the powerful local and neighborhood interests in likely opposition, and given that the impact of reforms would likely not be realized for the better part of a generation. That said, it’s already been almost two generations since the legal end of Jim Crow in the U.S. It would be a shame to let yet another generation pass without reforms that would, organically and incrementally, reduce racial economic disparities in the U.S.

Reader Discussion

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on March 08, 2017 at 13:07:03 pm

Agree with the sentiment wholeheartedly.

Some comments, however:

1) Soc Sec: At present there is no 'property rights" in Social Security *savings*, the Courts having decided this some years ago. Additionally, given the present "investment" scheme managed by the Federal Government, i.e., transferring such monies into the general budget, it is doubtful whether, for most people, that there is actually any "hard" dollar amount to be transferred to their heirs. The majority of these SS monies will have been disbursed in monthly payments to the beneficiaries; indeed, for many lower income citizens, of all races, they may in fact receive more than they contributed - again considering the low or negative rate of return on their contributions.
Would we not also need to remove Federal stewardship (such as it is) over these monies? How to do that?

2) It may be instructive to point out that this disparity in home ownership rates between white and black citizenry is soon to be less unique than present circumstances indicates. The high costs of home ownership is becoming increasingly prohibitive for the millennial generation. Recent surveys have shown that most of this generation are unable to afford homes and many have simply given up or have decided to abandon life in the metropolitan areas in which they are employed. We are not here talking about working class millennials but rather many of the higher educated, higher paid tech workers employed by some of the tech industries largest firms. This situation will become more pronounced if current pricing trends continue.

3) Many are considering "tiny houses", homes of less than 600 - 800 SF. In Seattle, WA proposals are being considered to alter zoning regulations to allow such small homes as well as "mother-in-law' homes built in an existing homeowners backyard. Yikes!!!! Other proposals are being considered - YET, to my knowledge there have not been any proposals to limit or reduce the astronomical fees associated with the building and permitting of single (and multi-) family homes. In some areas, the cost of such fees exceeds $50,000. Is it any wonder that rambler / ranch style homes are very infrequently constructed / included in a new housing development. Yet, these are the homes that are most affordable for the first time builder. In the past, a typical strategy for the new home owner was to purchase a rambler, maintain / improve it for several years, then sell, take equity and purchase a home more suitable to ones needs / growing family. Simply, ain't happening anymore.

4) There is, however, a recent trend that may serve to ameliorate, but not eliminate, the shortage of affordable housing. (An example for my little section of The Shire). City and county governments, in an effort to increase their tax base, are insisting (demanding in some instances) that denser housing developments be built. Accordingly, they have reduced minimum lot sizes to such an extent that a 1800 SF home is barely able to fit on the lot. Where environmental / zoning regulations would have previously "permitted" 16 homes, 34 new homes are now to be built and "special" allowances have been made to let the homes be built in what was previously an environmentally protected urban lake. while this will marginally increase the number of housing units available, the allowances come with a cost. Approximately, $1million in special abatement costs. Oh, well - win some, Lose some.
Yes, the residents were opposed to it. Yet, the County swept all concerns aside, even "re-writing (via Admin Agency re-interpretation of clear ) statutory language) in its effort to increase "urban density", never mind that it is the suburbs where this occurred.
What does this portend? Will the mandate for increased density work to the advantage of the citizenry, especially the interests of lower earners? Only if the price of the newer, more dense developments are held in check. Yet, higher density, per the local municipalities requires higher impact fees (traffic, schools, etc). Interestingly, these new homes will be priced rather higher than my own home was recently assessed - Yet they are 40% smaller in SF and 75% smaller in lot size. Who will purchase these homes?

Yep, the millennials, only a short 20 minute bus ride from the Seattle hub. Boeing workers need not apply, nor the minorities currently being forced out of the Central District of Seattle by gentrification AND excessive PROPERTY TAXES as they also cannot afford it.

I suspect Piketty is right re: capital. How is one to acquire capital if one is denied access to the single largest component of capital (for most people) - home ownership? Consider how great a burden is placed upon homeowners by excessive licensing / permitting fees for the new home and / or property taxes which in some cases are higher than the original monthly mortgage payments. It would seem that as with Social Security, government deems it proper to *manage* even the homeowners capital via assessing it as property taxes.

Governance at its best, isn't it!

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on March 08, 2017 at 15:25:10 pm

From the Methodology section at the end of the report:

"Four separate samples were used for data collection to obtain a representative sample that included an oversample of black and Hispanic respondents. The first sample was a disproportionately stratified random-digit dialing (RDD) landline sample drawn using standard list-assisted methods. A total of 822 interviews were completed using this RDD landline sample. The second sample was a disproportionally stratified RDD cell sample to oversample blacks and Hispanics. A total of 2,440 interviews were completed using this RDD cell sample. Respondents in the landline sample were selected by randomly asking for the youngest adult male or female who is now at home. Interviews in the cell sample were conducted with the person who answered the phone, if that person was an adult 18 years of age or older."

In other words, the statistics were heavily biased. The landline samples used the youngest adult at home, which means that the most unworldly and opinionated persons were chosen.

I'm curious when the polling was done. A daytime poll would include a lot of people who were unemployed, which would also bias the poll.

Since most couples tend to consist of a man and a slightly younger woman, the poll would also be biased towards the opinions of women. As would a daytime poll.

A good guess is that men are more likely to turn off their cell phones. (Just sayin'.)

People at work are more likely to turn of their cell phone during the day, so there is more bias towards the unemployed.

Cell samples also bias towards younger persons, so more bias there.

I don't think I would take this opinion poll too seriously, although I'm sure there is a least some substance to it. I would be more concerned with comparisons of income given education and experience, and actual measures of actual differences in wealth.

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Scott Amorian
on March 08, 2017 at 16:23:46 pm


Good take on the "statistics" from the Pew Report. I generally considered Pew Research to be on a par with those of the kind that nobody.really cited on "Right-Wing Violence" in another thread - highly suspicious, politically / ideologically motivated, etc.

However, for whatever reason, there would appear to be a significant disparity in capital accumulation between white and black citizens. Obviously, there are a host of reasons for this; but this essay concerned itself with capital accumulation consequent to home ownership. I think the author makes a fair case that all too frequently government POLICIES (large cap intended, again) are a major contributing cause to the un-affordability of housing.

As an example, and it should be noted that it also affects renters, the policy wonks of Seattle recently pushed through (imposed, more like it) an initiative to raise monies for low income housing. In short, the net effect has been to raise property tax assessment on the order of 25 - 35% in some instances. Landlords of low income residents are now compelled to raise rents by anywhere from $75 - $100 per month on their tenants. Gee, that worked out well, didn't it?

Or another example. My local municipal golf course has been directed by the City Government to sell its par 3 course in order to construct a multi-unit / pupose housing development. The City wanting to assure high property tax assessments has gone so far as to SPECIFY to the developer precisely what types of islands, counter tops, cabinetry, etc shall be installed. This will assure a minimum asking price for the homes AND a maximum TAX ASSESSMENT.

Ahhh, your government at work - and all in support of the Little Guy.
Oh, did I mention the City Council is run by Democrats, the party of the downtrodden, you see!

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Image of gabe
on March 08, 2017 at 21:03:05 pm

The disparity is $144,200/$11,200 or 12.9 times more white wealth.

One problem is that white elites preach the mendacity "choosing to pursue four basic values of faith, family, community and work is the surest path to happiness." This false promise is preached throughout the world by, for example, Arthur C. Brooks. See nytimes.com/2013/12/15/opinion/sunday/a-formula-for-happiness.html .

What's missing from Brooks' message is save&invest. The poor need to live on small enough percentage of present income and future so that by retirement age, they have accumulated sufficient wealth. This need is so vital to the nation that two changes should be considered. First, re-vamp American free-enterprise such that the most menial service or product that is marketable is rewarded with the cost of living including save&invest for reasonable retirement. Second, the save&invest portion of the wages should be held in an employer-managed federal account until needed for alternate investment, such as a home, emergency or retirement. Perhaps Social Security would not be affected by this program.

While home ownership is desirable, in the inner cities, another option is rent and accumulating corporate assets, such as index-stock-funds.

As the disparity widens, the market for elite property declines, and this is only a minor concern the elite may consider.

With wise changes in American free-enterprise, GDP could increase to unheard of highs---rising GDP helps everyone.

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Phil Beaver
on March 09, 2017 at 14:50:31 pm

Well, if you're going to be the party of the downtrodden; the more downtrodden there are and the more they are downtrodden, the more power you have and the more money you can make. Ain't that how it works?

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Scott Amorian
on March 10, 2017 at 09:21:30 am

One problem is that homeownership financed through a mortgage is the only tax-advantaged leveraged investment easily available to the average citizen. Renting and investing is an alternative (equities) can be leveraged, but that cost of leverage is usually not tax-advantaged.

As for the "elites" resisting zoning changes, what kind of an idiot favors a program which is designed to lower their own home's value?

Just saying...

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Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.