Black Americans feel disproportionate pain from high interest rates
The federal government’s efforts to contain inflation have a disproportionate impact on black Americans.
The Federal Reserve has raised interest rates in hopes of cooling a burning economy, but its actions are hitting black Americans — who have historically been squeezed out of home ownership and affordable loans — the hardest.
The Fed’s interest rate hikes aim to slow consumer and business spending by making debt more expensive, including mortgages. Mortgage rates are rising as the Fed raises its base interest rate, making monthly payments more expensive for anyone looking for a new home or for those who bought one with an adjustable interest rate loan.
“African Americans have the lowest homeownership rates among the four major racial groups in the country,” Romie Tribble, professor of economics at Spelman College and secretary of the National Economic Association, told The Hill. .
According to the Census Bureau, only 45.3% of black households owned their homes in the second quarter of 2022, compared to 74.6% of white households, 61.1% of Asian households and 48.3% of Hispanic households. .
“Now it’s going to be harder for them to acquire and keep a home,” Tribble said.
Black Americans have long faced higher barriers to homeownership than their white counterparts, which is one of many forces driving a significant racial wealth gap.
During the post-World War II economic boom, racist lending practices and bans on selling homes to non-white families shut millions of minority families out of the housing market.
While Congress passed laws to end discriminatory lending practices in the 1970s, discrimination in the housing market still persists. And the racial wealth gap created in part by housing discrimination has left black families with fewer resources to help them access homeownership.
For many black homeowners, interest rates are already often higher than their white counterparts, regardless of income, 2021 study finds Harvard University study. This is partly because black homeowners are considered a greater financial risk than white homeowners.
Combined with the nationwide housing shortage, Tribble said, these concerns exacerbate all housing inequities.
While higher interest rates are likely to have a heavier impact on Black Americans, the decades of near-zero rates intended to help low- and middle-income households shore up their finances haven’t been so bad for them. helpful, experts say.
The Fed cut its base interest rate range to levels near zero following the 2007-2008 financial crisis to help keep money flowing through the economy. The central bank kept rates close to zero until 2015 and only gradually raised them in the years that followed.
The Fed’s ultra-low interest rates in the wake of the Great Recession and the COVID-19 recession helped fuel record house prices as households with the means to keep up benefited from mortgage rates down. Homeowners were also able to refinance their mortgages at lower rates, giving them more money to save for a home purchase.
But those rock-bottom rates haven’t helped homeless black Americans and others on the fringes of the housing market, while pushing house prices even higher.
“The Fed during this period argued that ultra-low interest rates supported household wealth by allowing homeowners to reduce their cost of housing through refinancing and thus improve their wealth situation. But this has proven to be nowhere near as true for low- and moderate-income people, especially minorities,” said Karen Shaw Petrou, author of “Engine of Inequality: The Fed and the Future of Wealth in America.”
“We now have 22 years … of policies that make it harder for low- and moderate-income households, especially those of color, to be homeowners. “
But even for those without mortgage payments, high interest rates have led banks to continue offering predatory lines of credit to black Americans.
Many African Americans don’t participate in the stock market, said Sharif Muhammad, CEO of Unlimited Financial Group Inc. and board member of the Association of African American Financial Advisors, which means the money whose they do not have high growth prospects during a normal rate of inflation.
“But now when we’re in this hyperinflationary environment, the purchasing power is even deeper,” Muhammad said.
But a lack of financial literacy leads consumers to spend more — and buy more on credit, too.
The problem is, Muhammad said, that banks take advantage of this lack of knowledge by extending credit to unsuspecting African-American communities who “then use it as an extension of their purchasing power rather than seeing it as a real loan of money.
And when interest rates hit, Muhammad said, it becomes a “double whammy”.
“Your money doesn’t grow because you keep it in a savings account or in cash and don’t invest it properly,” he explained, “and then you spend money using credit cards that increase at near usurious rates and compound daily.”
The impact of these high interest rates also seeps out of homes and into businesses.
For many small business owners, the pandemic has deeply affected their ability to stay afloat, and black-owned businesses have suffered the most.
Now, even as the country enters a post-pandemic period, the struggle to recover persists.
On average, black-owned businesses are already paying 1.4% more interest than white-owned businesses, according to the U.S. Department of Commerce’s Minority Business Development Agency.
With rising interest rates, the cost of borrowing also increases. Most of these small businesses operate on “working capital,” or bank-accessible capital, Tribble said.
“For a small restaurant, rising interest rates in working capital means either ‘I’m going to have to reduce the number of employees, or I’m going to have to reduce hours of operation,'” Tribble said.
Which in turn exacerbates racial disparities in unemployment.
Black Americans face higher unemployment than whites at all levels of education, according to the Associated Press. And despite the seemingly good job market, Muhammad stresses that the job count is a “lagging indicator” that won’t accurately reflect job retention until next month.
Still, Tribble advises black Americans to try to keep their jobs.
“I know the prices are really tough,” he said. “I know low-income people have to make tough choices. The limited money and limited funds that we have, we just have to use them more efficiently than ever before.
Muhammad also had advice: “get aggressive” in paying off the debt. He also added that now could be a good time to take advantage of investment opportunities and meet experts.
For those who might be preparing for a possible layoff, he said, it will help ensure they have a “rainy day war chest”.
“Sit down with an adviser to really look at your tax situation and see if there’s anything about the provisions of the new tax laws that you’re not currently benefiting from,” he advised.