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Op-Ed

The Racial Wealth Gap: Myths and Realities

RealClearMarkets

August 4, 2023

The racial wealth gap has become a central component of claims of systemic racism and one of the core justifications for reparations. The main focus has been on housing market dynamics. Supreme Court Justice Jackson made reference to the racial bias of 1940s federal housing policies in her dissent on the college affirmative action case. Quoting a selective group of researchers, she wrote, thus, based on their race, Black people were “[l]ocked out of the greatest mass-based opportunity for wealth accumulation in American history.”

While there is no question that 1940s racial biases had a detrimental impact on black homeownership, the claims made don’t reflect the housing market dynamics of the postwar era. Moreover, the level of racial wealth disparities is often exaggerated and primarily driven by the private equity and business holdings of a white elite.

Let’s begin by looking into Justice Jackson’s claim.  Like those she references, an emphasis is on the so-called redlining policies of the federal government.  During the Great Depression, the Federal Housing Authority (FHA) divided neighborhoods into five categories from the most desirable to least desirable. Housing in the lowest two categories had difficulty getting mortgages. Black ownership was just 20 percent in the lowest-rated neighborhoods, but represented 90 percent of all black-owned housing.

When running for president, both Kamala Harris and Elizabeth Warren proposed subsidizing home ownership for lower-income residents of neighborhoods that were subject to redlining policies implemented by the government from 1933 to 1977. However, Brookings Institute researchers Andre M. Perry and David Harshbarger rejected the Harris-Warren initiative because only 28 percent of current residents in formerly redlined neighborhoods are black. They claimed that providing benefits to all disadvantaged residents of formerly redlined areas does “not redress the main racial group that was explicitly targeted.”

However, they offer no evidence of this racial targeting. Nor does Ta-Nehisi Coates in his 2014 Atlantic article that spurred the reparations movement. Concerning the redlined districts, he wrote, “Neither the percentage of black people living there nor their social class mattered. Black people were viewed as a contagion.”

Indeed, one study that comprehensively covered this issue concluded that the vast majority of black-owned housing were accurately classified.  It concluded:

“Our results suggest that racial bias in the construction of the HOLC maps can explain at most 4 to 20 percent of the observed concentration of Black households in the lowest-rated zones. Instead, our results suggest that the majority of Black households were located in such zones because decades of disadvantage and discrimination had already pushed them into the core of economically distressed neighborhoods prior to the federal government’s involvement in mortgage markets.”

Redlining undoubtedly had a more harmful effect on black than white home buyers.  And the generous mortgages available to WWII veterans were much easier for whites to obtain. However, there was a robust growth of black home ownership during the postwar era; continuously increasing from 21% in 1940 to 54% by 1980.  

To be clear, Jackson’s quote is lifted from the work of Melvin L. Oliver and Thomas M. Shapiro who wrote,

“Locked out of the greatest mass-based opportunity for wealth accumulation in American history, African Americans who desired and were able to afford home ownership found themselves consigned to central-city communities …”

The claim is that they were excluded from homeownership outside the central city. Indeed, the white process freed up substantial central-city housing across a wide range of neighborhoods; housing that was available for both home buyers and renters for the growing black populations that had migrated North. Moreover, once some neighborhoods racially “tipped,” there was flight of the vast majority of remaining white residents.

Unlike the Oliver-Shapiro assertion that “their homes and communities deteriorated and lost value,” many of these black neighborhoods were previously upper-middle class ones. This filtering down housing process provided a financial foundation for many black families. And when the professional classes chose to repopulate some of these neighborhoods, black homeowners, including Washington DC’s Shaw district, reaped the gains from further housing appreciation.

Wealth data seems to be consistent with these dynamics. According to a 2023 Federal Reserve reportaverage white wealth is just about four times average black wealth. However, if we only looked at real estate holdings, the ratio is only 2.5.  What drives the larger overall disparity is private stock and business holdings, reflecting 38% of white but only 11% of black wealth. However, these holdings are overwhelmingly held by the richest 10 percent of white households who own 75 percent of all white wealth. 

The left-wing blogger Matt Bruenig found that if black households in the lower half of their distribution had their wealth raised to be exactly the same as white households in their lower half, the overall racial wealth gap would be reduced by just 3 percent.  As a result, he concluded, “What this shows is that 97 percent of the overall racial wealth gap is driven by households above the median of each racial group.”  Indeed, over two-thirds of racial gap reflects the differences in assets held by the top ten percent of households in each group. Class, not race is the major driver of wealth inequality. 

To be sure, racial disparities in home ownership rates persist. But a significant share can be explained by family structure. In 2022, overall black homeownership was 44 percent; but for married couples it was 64 percent, virtually the same as the overall white homeownership rate. Moreover, in the last thirty years, the suburbanization process has had a dramatic effect on the residential location of the black middle class. Today, more than 54% of all black Americans residing in the 60 largest metropolitan area lives in suburbs. Researchers concluded:

The study’s findings essentially show two Black Americas: Black suburbanites increasingly living in more integrated neighborhoods with higher-quality indicators and lower income Black city dwellers seeing their neighborhood characteristics stagnate or worsen.

This suggests that help for the black community should be targeted to those vulnerable urban communities: support for young mothers and vocational education to help young black men onto the first rung of success.  But most of all, dramatically reducing the gun violence that permeates the poorest black neighborhoods with law enforcement playing a central role, coordinating with community groups and service professionals.