3 Ways To Close The Racial Wealth Gap After The Pandemic

by Kemberley Washington

Forbes Advisor

Thursday July 15, 2021

Stock image
Stock image  (Source:Getty Images)

While the pandemic has devastated millions of Americans' financial security, the inequality of the racial wealth gap means that Black people have been hit even harder.

And while no single action can help close the racial gap or undo the systematic racial injustice that has existed for decades, experts believe homeownership, market participation and business ownership are vital in closing the gap.


How the Racial Wealth Gap Widened During the Pandemic

The racial wealth gap is far from new. Before the COVID-19 pandemic, Black people had lower levels of wealth compared to whites. The median white household held $188,200 in wealth — which includes savings, retirement accounts and real estate — in 2019, compared to just $24,100 for Black households, according to the Hamilton Project.

Lower levels of wealth make it harder to access cash in an emergency, which put people of color at a significant disadvantage at the start of the pandemic.

In an April 2020 Pew Research survey 73% of Black respondents did not have enough emergency funds to cover three months of expenses compared to 47% of whites. Forty-eight percent of Black respondents said the pandemic made it harder to pay some monthly bills, compared to 26% of whites.

Black people also sustained greater job losses during the pandemic. According to a report by the Congressional Research Service, while unemployment rates increased rapidly in early April 2020 for Black, white and Asian workers, a higher rate of unemployment persisted for Blacks a year later.

In May 2021, the Black unemployment rate was 9.7% compared to 5.3% for whites.


How to Close the Racial Wealth Gap

Many Americans will face a long road to personal financial recovery after the pandemic. For the Black population, a few key measures could aid as they continue to rebuild and grow their wealth.

Home Ownership

A significant increase in Black homeownership is one way to bridge the racial wealth gap, as owning a home is still a primary method of building wealth and financial security in the U.S.

Housing and lending discrimination along with income disparities make it harder for Black people to break into homeownership, says Lynnette Khalfani-Cox, co-founder of AskTheMoneyCoach.com and author of "Zero Debt: The Ultimate Guide to Financial Freedom."

"For most [people], 70% of net worth is tied to one's home," says Cox. "Black people own homes at a much lower rate than whites and in many cases, their homes are often undervalued compared to similar homes in majority-white neighborhoods."

According to the National Community Reinvestment Coalition in 2018, only 42% of Black people owned homes compared to 73% of whites during the same period.

Even more alarming is the racial bias that exists within the housing market.

A report conducted by the Brookings Institute found that comparable owner-occupied homes located in predominantly Black neighborhoods are often undervalued by $48,000 on average versus homes where less than 1% of residents are Black. The report estimates that this devaluation can account for about $156 billion in cumulative losses for Black homeowners.

Understanding the importance of eliminating the home ownership gap, many initiatives have been developed to encourage Black home ownership.

The National Association of Real Estate Brokers' Two Million Home Program seeks to eliminate the racial gap within the United States by advocating for Black homeownership. In addition, the National Community Reinvestment Coalition suggests taking bold initiatives to add 165,000 new Black homeowners annually by 2040 to increase the Black homeownership rate by 60%.

President Joe Biden's administration also seeks new actions to narrow the racial wealth gap. Biden proposes a new Neighborhood Homes Tax Credit to private investors to develop affordable homes for low and moderate income homeowners.

Investing

Market participation is also key to building wealth. Those who participate in the stock market by investing are likely to have more wealth than those who do not.

White families had six times more in retirement savings than Black people, according to a 2016 study by the Urban Institute. This rate persisted even after controlling for income. The report also found that Black people were less likely to participate in employer retirement plans compared to whites.

Kevin Matthews II, founder of Building Bread and author of "From Burning to Blueprint: Rebuilding Black Wall Street After A Century of Silence," believes that the key to building wealth and closing the wealth gap is to encourage more Black participation in the market. Matthews started his career as a financial advisor with ING Investment Management and at that time learned about the importance of investments.

"In 2010, I ran a what-if scenario to determine how much wealth I could have accumulated, if my parents invested $1,000 per year until my teenage years," says Matthews. "After realizing my parents could have potentially accumulated over $800,000, I started my business, Building Bread, to teach others the importance of investing.

Matthews cites that often Black people forego the market because of their lack of understanding, but is determined to change this mindset.

"While the stock market isn't perfect, it is one of the least racist institutions that we have," says Matthews. "Unlike the housing or job market, the market provides an equal opportunity because if Blacks and Whites invest in the same stock, the outcome is the same for all."

Business Ownership

Black business ownership can also be the key to closing the racial wealth gap.

President Biden has pledged to reduce the racial business gap by increasing federal spending for Black-owned businesses. His administration plans to pledge an additional $100 billion to small disadvantaged business owners.

A study found that Black business owners have 12 times more wealth compared to Black people who did not own businesses. A 2012 survey found that Black businesses contributed up to $165 billion in revenue and created more than 1 million jobs.

While Black business ownership is the key to bridging the racial wealth gap, Black people have lower levels of business assets compared to other racial groups. A report from the Center for Financial Household Stability at the Federal Reserve Board of St. Louis found that Black business owners held 8 percent in business and financial assets compared to white and Asian Americans, which hold one-third of their assets in business and financial assets.

Since Black people are less likely to have business ownership interest, the wealth gap continues to persist.

But even with this, Cox still encourages Black people to consider starting a business to build wealth. Even if it is in addition to a regular job, Cox says one client or contract may make a significant difference in a Black person's wealth over time.