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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.

 
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Posted by on October 11, 2015 in American Greed

 

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Walking Away From the Pain

The New Mortgage Revolution: Walk Away

Underwater on your McMansion? Dump the Mortgage!

Big real estate developers do it all the time – like yesterday, when the owner of New York City’s Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that’s much bigger than your home is actually worth?

Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it’s not just alright to walk away from one’s over-sized mortgage — it may actually be a moral imperative. (An earlier Times article, by Roger Lowenstein, said much the same thing.) After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It’s just not fair to expect borrowers to follow rules that the lenders don’t.

But why stop there? Some commentators are now calling on borrowers to start a mass mortgage strike.
“Remember burning draft cards? Burn your mortgage,” the blog DailyKos told readers recently:

“The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that’s what we must do. Doesn’t have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment….just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced.”

Now the call for a borrowers’ revolt is being joined by folks who know an opportunity when they see it: real estate agents. Over the past month, agents have been rushing to declare 2010 “the year of the strategic default.” Here’s Connecticut Realtor Minna Reid

Loan modifications do not address the real problem of heavy negative equity and are sure to fail most of the time. Even if the homeowner lowers their current payment they are left more trapped than ever. There will be no quick recovery this time. Years later when there is a need to HAVE TO move, the original problem of being upside down remains and the modified homeowner is left to short sell or foreclose once again.

Isn’t it better to just cut the losses upfront ?

I know many will consider strategic default wrong or immoral, but as for me, I stopped passing judgment long ago.

Reid is far from the only real estate agent using mass revolt against the banks as a sales strategy. San Diego broker Bob Schwartz asks, “How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home’s value will bounce back anytime soon…. Defaulting “strategically” can entice more walk-aways by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away.”

Ouch for the banks! But strategically not a bad move.

 
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Posted by on January 26, 2010 in News

 

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