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Personal Finance

The barriers Black families face in building generational wealth

Momo Productions | Digitalvision | Getty Images

The racial wealth gap in the US is stark. For every $1 of wealth held by a white family, a Black family had just $0.25 in 2022, according to the Federal Reserve Bank of St. Louis.

Black families face unique, racist barriers to creating wealth, from homeownership to business ownership, says Salene Hitchcock-Gear, president of individual life insurance at Prudential.

"That is not by accident, that is more by historical design, [through] programs, disadvantages, all of the things that we know about in terms of redlining, and denial of credit for small business, and on," she says.

To work towards closing the racial wealth gap and building generational wealth for Black Americans, it's important to understand what obstacles stand in the way. Here are three main barriers to building generational wealth, as well as some solutions that could help close the gap in the future.

Lack of access to homeownership

For years, Black Americans haven't enjoyed equal access to homeownership. "Quite a bit of wealth in America is based on homeownership," Hitchcock-Gear says.

Redlining, or the practice of discrimination during the home-buying process because of someone's race or ethnicity, has denied many in the Black community equal access to credit and homebuying access. "Black Americans do not have wealth in homes, largely due to the background I described, around not having access to credit and banking services," Hitchcock-Gear says. "When it is available, it's been met with quite a bit of discriminatory practices over the years."

Those practices include racist covenants inserted in property deeds, which forbade Black Americans from owning houses in certain neighborhoods until the 1948 Supreme Court case Shelley v. Kraemer, and the passage of the Fair Housing Act of 1968. Steering, a tactic where agents selectively show homes to clients based on the race of the buyer and neighborhoods, also kept Black homeowners from buying in certain areas, though it's also illegal under the Fair Housing Act.

Black homeowners also must contend with lower home values, which result in less profit from home sales and put tools like home equity loans out of reach. A 2021 Brookings Institute study estimates that Black-owned homes are undervalued by 23%, for a total of $156 billion of lost wealth in total across the US.

Some cities, including Asheville, North Carolina, and Evanston, Illinois, are providing assistance to Black homebuyers. In the latter city's program, $25,000 grants would be available to Black homebuyers who lived in the city between 1919 and 1969 or are a direct descendent of someone who lived there during that time.

In addition, there are other programs that are helping Black borrowers to purchase homes. Bank of America launched a program called the Community Affordable Loan Solution that offers zero-closing cost and zero down payment mortgages to those in majority Black and Latinx neighborhoods in five cities across the US. But, critics of the program note that these neighborhoods also need further investment for the programs to see long-term success.

Black Americans are more likely to be underbanked

Black Americans are also more likely than white Americans to be underbanked or rely on alternative financial solutions outside of mainstream banking. These alternative solutions, such as check-cashing services and payday lending, tend to have higher costs and fees than traditional banking services.

According to a study from Boston Consulting Group, about 47% of Black and Latinx households were underbanked in 2021. "If you have that much of the population in the Black community underbanked, even the simple tools like compounding interest and the things that people understand are not going to be readily available," Hitchcock-Gear says.

Without these tools, it can be difficult to help money grow and generate the kind of wealth that transfers through generations.

Hitchcock-Gear says that banking and financial services need to be intentional about how they identify customers and work to understand the needs of Black Americans. "In financial services, we typically use an asset and income test, where if you make so much money and have so much in the bank, you're probably a customer of ours. What we've learned is that that's actually not the best way to think about who a customer is," she says. "If you understand what a person needs – whether they're worried about their family's security, worried about retirement — you can go across an income continuum and find a viable customer that has nothing to do with the traditional sects."

Another way policymakers can help solve the problem of underbanking is by increasing the accessibility of financial literacy programs in the Black community. "From a policy level, integrating financial literacy as a mandatory curriculum in K-12 would help bridge the gap between wealth and race," Monique White, head of community at Self Financial, told CNBC Select by email.

Black Americans face lower median credit scores

While the credit scoring system was created to take the bias out of lending, it's become yet another hurdle that prevents many Black Americans from building wealth. "According to a recent study by the Urban Institute, young adults in Black communities had significantly lower credit scores than [those in] Hispanic or white communities," White says.

The 2022 study by the Urban Institute looked at the median credit scores of young adults in primarily Black, Latinx, and white communities. According to the data, Black young adults aged 18 to 20 had a median credit score of 24 points lower than their white peers. Those aged 21 to 24 in majority Black communities had a median credit score 83 points lower, and between ages 25 and 29, the gap widened further with a difference of 105 points.

"This is significant because credit is important for achieving financial goals like renting an apartment, being able to buy a car, access lower [interest] rates, and eventually homeownership," White says. As credit scores are the key to gaining access to many opportunities, having lower median credit scores can hold back Black Americans.

Several solutions have been proposed, including one from President Joe Biden on creating a federally-backed credit bureau. According to the policy proposal, a federal credit reporting agency could reduce racial disparities in credit reporting. Additionally, some action has already been taken on removing medical debts from credit reports — a type of debt that disproportionately affects Black and Latinx communities.

The bottom line

After many generations of being excluded from wealth-building, Black Americans still face a unique set of challenges stemming from racial discrimination. However, making homebuying and financial literacy more accessible could start to narrow the wide racial wealth gap in the US, and help Black families build generational wealth. It's by no means a perfect or comprehensive solution to one of America's most deep-seated injustices — but it's a long overdue start.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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