America has recovered less than half of the wealth it lost in 2008, after adjusting for inflation and population growth. That's the dismal finding of new research from the St. Louis Fed. Worse, that recovery has been very uneven. As the stock market has regained lost ground, affluent families have recovered most of what they lost. But for the rest of the country, whose wealth primarily came from housing, repair of the household balance sheet has been much slower.
The losses have been particularly acute among minorities. Look at the difference between the white and Asian experience, on the one hand, and the black and Latino experience on the other. Even controlling for education, minorities lost a lot more.
What you're seeing is that minorities had more of their wealth tied up in housing, and they lost more on their homes. They were more likely to be in subprime loans, they had less income and wealth to weather the foreclosure crisis, and they were more likely to be buying in new exurban developments or majority-minority neighborhoods, which tended to lose more value during the crisis. You can see this in the Washington Post's interactive map of home prices in the region: median prices in majority minority zip codes like mine are still well below their 2005 highs, while the whiter zip codes to our west are now above their 2005 levels.
There are a lot of reasons for this, including the fact that DC's black longtime residents have been largely left out of the recent boom. But here's another important one: starting with lower incomes and lower average wealth to start with, minorities in the District of Columbia were more dependent on loans with very high loan-to-value ratios, because they didn't have families who could step in with hefty downpayment help. As those loans have dried up, the average price that buyers in majority-minority neighborhoods can offer has fallen precipitously.
This is one of the most pernicious kinds of structural racism. The legacy of racism is deep structural inequalities in wealth and income. That's the bad news. The worse news is that those inequities can persist even if the original discrimination goes away. Even if we somehow resolved our current bitter racial disputes, we would still have to contend with the current disparities echoing down the generations.
Imagine a world in which race differences have diminished to the point where all that is left is a very moderate preference to be near some people who are the same race as you. Not a majority, mind you; just a few. You can imagine this as demand for specific amenities--there are reasons that Orthodox Jews cluster in historically Jewish neighborhoods in New York, even though formal and informal anti-semitic discrimination has pretty much gone away, and Italians still dominate various areas of Westchester and New Jersey.
Or you can imagine this merely as not wanting to be the only person of your race around. Any white person who has traveled in rural Asia or Africa can attest to the discomfort of sticking out as the only caucasian. Any nonwhite person in America can probably testify to this from more local experience. Say people are happy to live in a neighborhood dominated by another race, as long as they are not actually the one and only person of their own race to live there. Work by Thomas Schelling, described here by Jonathan Rauch, shows that even that relatively mild preference can produce substantial residential segregation.
That's an image of what happens to a simple computer model of two agents, red and blue, who have only one preference: they don't want to be the only one of their color in the box surrounding their square. Pretty quickly, they sort into clusters, as the unhappy ones (who are entirely alone) move.
So now ask yourself: what happens if red and blue start off with very different average wealth? Say the average red dot has twice as much wealth as the average blue dot.
What you'll see is that homes in blue areas will cost a lot less than homes in red areas. Blue homebuyers will inherit less, and they won't get as much help with downpayments. That will limit the amount of money they can spend on a home. (We are assuming a world without the crazy 103% LTV ratios of the bubble).
This, in turn, will reduce the amount of home equity that blue homebuyers build. Which will, in turn, mean they retire with less wealth, and bequeath less wealth to their children. This doesn't just mean a smaller pile of money; it also means less capital to start businesses or make other investments.
These disparities could be overcome with hypersaving; that is, by and large, how income groups that closed the gap have managed to do it. But for any given level of income, and prudence, as long as homes remain a primary vehicle for wealth building, blue families will end up with a lot less wealth than red families even if discrimination ends.
Now, I'm not arguing that this is the world we actually live in right now. Obviously, residential segregation in the United States is currently being driven by a lot more than a very mild preference for having a single person of your own race nearby. Rather, I'm pointing out just how persistent the original discrimination can be. You don't need people to be saying "I don't want to live near any black people" to drive down the value of their homes, and in turn, their net worth. You just need someone to have said that at some point in the past.
