The Housing Bust and the Destruction of Black Wealth

The 2005 Housing bust destroyed more black wealth than any event in American HIstory since slavery.

 

Black Americans Would Have Been Better Off Renting Than Buying

The first several years of the 21st century were relatively good ones for the housing market—at least on the surface. Homeownership climbed to around 70 percent, and all that demand meant lots of new construction and increasing home equity for existing owners. If someone was lucky enough to buy and sell before the market went bust, or if their home wasn’t in an area with catastrophic value loss, they probably increased their net worth just by keeping a roof overhead. Unless they were black.

“Becoming a homeowner was not a fruitful asset accumulation strategy for low- and moderate-income black families in the 2000 decade, in either the short- or medium-term,” write Sandra J. Newman and C. Scott Holupka, authors of a new study from Johns Hopkins University.

To come to that conclusion they looked at data from the Panel Study of Income Dynamics (PSID), a representative survey of 5,000 American families. They find that white Americans with low net worth who bought during the boom years made out much better than black Americans who had the same timing and similar financial circumstances. Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn’t have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 by 2011. All told, the black families lost, on average, 43 percent of their wealth.

That news is perhaps to be expected given the inequities that exists in the housing market, including the quality of financing people have access to and the prospects of the neighborhoods they are buying into. The researchers note that neighborhood location, predatory loan practices, and how long families were able to hold on to homes all likely played a role in how white and black families fared during the early aughts.

Newman and Holupka also investigated how black families would have fared if they had chosen to rent instead of buy. In order to do that, they took a look at the net worth (that is all assets minus all liabilities) for families that did have a mortgage and families who didn’t. Generally, net worth for renters increases marginally each year—as workers get raises, or families pay down debt. For first-time homebuyers, those increases can be much faster, thanks to both the acquisition of a large asset and home value appreciation. But they found that in general black families would have been better off if they hadn’t bought homes at all.

According to the data white families who rented would have ultimately gained $6,600 between 2005 and 2011—less than they earned as homeowners, but still a nice gain. But for black families the choice to rent instead of buy could have moved them from negative to positive net worth. In two years, between 2005 and 2007, wealth would have increased to $1,300, and it would have hit $2,700 by 2011.

Those gains, to be certain, aren’t astronomical, but they are also certainly more promising than the tens of thousands in disproportionate losses that black homeowners experienced and are still trying to overcome. For black homeowners, there were never enough financial gains to offset the massive losses they sustained. But sadly, renting may not be much of a solution. In most places, rent just keeps on rising, which means fewer options for families already struggling to build wealth.

 

Big Enough to Fail… Bank of America

It appears the rats are jumping the Bank of America ship…

The next real serious challenge for the Obama Administration is going to be dealing with the banks. The foreclosure crisis is just the tip of  a very deep iceberg. While BOA has paid back the TARP funds, it appears they didn’t use a penny of the money to get the rats and thugs out of their operations…

I believe the only way to do that is criminal investigation and prosecution.

Bank of America Edges Closer to Tipping Point: Jonathan Weil

It was only last April that Bank of America Corp. was making fools out of the doomsayers who had called for its nationalization a year earlier. Taxpayers had gotten their bailout cash back. Investors who bought its shares at the bottom were making a killing. Government leaders lauded the company’s rescues, both of them, as a great success.

Now the bank may be on the verge of trouble again. Its stock has fallen 41 percent since April 15. Mortgage-bond investors are demanding untold billions of dollars in refunds. The foreclosure fiasco is metastasizing. A member of the Troubled Asset Relief Program’s oversight panel, AFL-CIO attorneyDamon Silvers, openly worried at a hearing last week about the risk that Bank of America might need another bailout.

A few more months like the last one, and we may be wishing Bank of America had never returned its $45 billion of TARP money.

You wouldn’t know there’s anything wrong with Bank of America by an initial look at itsbalance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Tipping Point

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough. Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.

When I asked Jerry Dubrowski, a Bank of America spokesman, about the disparity, he said: “I’m not going to comment on the book value and the stock price.”

It may be the shares are a bargain at $11.52, if the company’s books are right. Another plausible scenario is that Bank of America’s management, led by Chief Executive Officer Brian Moynihan, has lost so much credibility with investors that the stock’s decline might start feeding on itself.

The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.