Rebalancing the American Dream: Forging Pathways to Financial Security

By Gabriella Chiarenza

In the news and among the public, recent discussions have focused on the income gap between the rich and the poor in the United States. Yet the deep and growing divide between American households in terms of wealth – the sum of assets, such as retirement savings or a house, minus debt – has received less attention, even as it is proving deeply disruptive and quite difficult to reverse.  Accumulated wealth and diversified savings can be far more important than income for keeping household finances stable through volatile shifts in the economy. 

The damaging impact of the foreclosure crisis and recession on homeownership – the main pathway for building wealth, especially for low-and moderate income (LMI) households – brought this point into stark relief.  Many financially-constrained households concentrate their wealth solely in their homes, and the broader housing market upheaval changed the prospects for prosperity for those Americans whose hold on financial stability was tenuous at best.  African American and Latino households were particularly vulnerable to the crisis and experienced substantial losses during the recession, with fully half of the total wealth of African American families and 67 percent of the total wealth of Latino families lost between 2007 and 2009 thanks to foreclosure or deteriorated home equity. LMI households and households of color depending on home equity to finance their children’s education are coming up short. Those reliant on selling their home to retire comfortably may be finding a less competitive buyer’s market.  

While it is critical to recognize that homeownership remains one of the largest and most vital assets for many families, investing solely in a single asset such as a home can be detrimental to household wealth if that asset is lost.  By further diversifying their assets beyond physical property alone, LMI homeowners therefore may be able to better maintain long-term financial security.  It is also important to acknowledge that homeownership is not a viable or preferred asset building option for some Americans.  For all of these households, a continuum of wealth building approaches beyond homeownership offers opportunities to establish, diversify, and grow their asset portfolios.  

There are a growing number of programs and policies, including those described in our new Summer/Fall 2014 issue of Community Investments, aimed at supporting families in stabilizing and growing their overall net worth and protecting it for future generations.  This issue discusses many of the factors behind the growth of the American wealth gap, and offers recommendations on how to ensure homeownership can remain a steady wealth building option for LMI households.  Yet with this issue we go beyond homeownership to highlight programs and policies that expand consumer access to more affordable financial products; support renters in building their credit history; and provide assistance to families investing in their futures through children’s savings accounts, entrepreneurship, and retirement. 

Earning, saving, investing, and protecting assets are building blocks that add up to what CFED refers to as the Household Financial Security Framework. By targeting policies and programs toward each of these critical building blocks, more families and communities and even the nation as a whole can realize sustained financial stability.  While it may be difficult to imagine a U.S. economy in which homeownership is not the major asset for most households, the strategies presented in this issue reflect the emergence of a new landscape of sustainable, wealth-building opportunities that promise improved access to a variety of assets for a wider range of American households. 

Read more on this topic in Community Investments (Volume 26, Issue 2) Rebalancing the American Dream: Forging Pathways to Financial Security.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

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