Closing the gap: our economists agree that homeownership and retirement planning are a potent pair when it comes to building net worth

Black Enterprise, June, 2005 by Donald Jay Korn

MAISHA AND ERIC DAVIS MADE A MAJOR move last year, literally and financially. "We bought our first home, a three-bedroom house in Baltimore. it's in a quiet neighborhood, with a big yard where our children can play. It's a good feeling, knowing that it's ours," says Maisha, 30, "we're no longer throwing away money on rent."

Just a few years ago, the dream of homeownership seemed out of reach for the Davises. "We had some credit problems in our past," says Maisha. "When we applied for a mortgage, there were still some blemishes on our record, so the transaction fell through."

In early 2004, though, Maisha's employer sponsored a seminar for first-time home buyers. (Both Maisha and Eric, 34, are social workers for nonprofit organizations.) "I was pleasantly surprised to learn how many different financing options there are," says Maisha. "If your credit is in order, it's easier than you think to get a mortgage and buy a house."

But not enough black families are buying homes, causing an ever-widening wealth gap between whites and African Americans in the U.S. According to the National Urban League, which recently released its annual State of Black America report, the homeownership rate for African Americans is nearly 50%, versus more than 70% for whites. This disparity in homeownership is reflected in net worth as well: a median of 56,100 for an African American family compared to 567,700 for white families.

Wealth-building strategies were the topic at a March meeting of the BLACK ENTERPRISE Board of Economists. The consensus among the BE board is that homeownership is the key to obtaining wealth.

"The net worth that was reported for white families is mostly home," says Michelle Singletary, personal finance columnist for The Washington Post. "It's not money in the bank. Homeownership is the key, in terms of obtaining wealth. People buy homes, keep them, or trade them. When they retire, they sell their homes, and that's where their money comes from."

Homeownership, especially for young people, can be the foundation of wealth building, according to Gerald D. Jaynes, a professor of economics and African American studies at Yale University who is also on the board. "Homeownership is one means of starting," he says. "And it is probably the most important means, because it is going to be the most important asset for 95 out of 100 people."

But that step isn't as steep as it may seem. "A lot of people think that they have to save up 20% of the price of their ideal house," says BE board member William Spriggs, senior research fellow at the Economic Policy Institute in Washington, D.C. "They think, 'I have to have 5100,000 [to buy a 5500,000 home], and I don't have anything like 5100,000, so I'm never going to own a home.' They just role it out."

But there is help available. 'There are a lot of first-time home buyer programs now," says Singletary, "and a lot more loan products, but many of those are for people who have good credit scores."

Which leads to another key point: "You can't overemphasize, particularly for young people, the importance of good credit," says Thomas D. Boston, president of the Boston Research Group Inc. "If you have clean credit, you can get almost a 100% loan. There are many ways that you can get into a house, but you can't do it if you don't have established credit."

Your creditworthiness will be measured by a credit score, and not all credit is created equal. "Having a bank credit card is OK," says Spriggs. "However, if you have a department store credit card, you lose points from your credit score."

Existing homeowners should have their house appraised at least every other year, according to Boston. "A lot of people who buy a house are like people I know who buy art," he says. "They think that just because they own some art, it's going to automatically zoom up in value. However, it may go nowhere."

Many African Americans are missing out on the benefits enjoyed by families that have home equity they can tap into to pay for college costs, home improvements, or to help the next generation obtain their own homes. But not the Davises, who bought their home for $140,000 with 100% financing.

"Our home recently was appraised at $175,000," says Maisha, "so we're planning to refinance our loan. We'd like to pull out some of that home equity and use it for improvements, such as upgrading the bathrooms and installing central air-conditioning. Now that we're homeowners, we've become more proactive about taking care of our property."

Appraisal costs vary, from $100 and up, depending on the size of the house. "If you do that every other year, you'll have a good idea of how much equity you are building in that house," Boston says.

By improving their home, the Davises are taking another vital step toward building wealth for themselves and their children.

If more African American families experienced what the Davises have, seeing a $35,000 increase in home equity in less than a year, that $6,100 median net worth would be much greater.