Savings & Wealth Accumulation Trends of the Hispanic / Latino U.S Population

Victor M. Ramirez Citibank, Community Relations October 3, 2005 “Asset Building: The Perspectives of People of Color” Convened by the National Economic Development & Law Center Tuskegee, Alabama.

Funded by the Ford Foundation 1

Current Hispanic / Latino Population

• 41.3 million Hispanic / Latinos in the U.S : 14% of Population • If Latinos in U.S formed a country, it would be the 5 th largest Latin American country • Includes recent immigrants, their children, and multiple generations • 69% of population concentrated in Southwest • California, Nevada, New Mexico, Texas, Florida, New York • Comprise 52% of annual immigrants into the U.S

• 700,000 per year; 40% undocumented • Constant supply of first generation immigrants ensures retention of culture, language and behavior patterns longer than other immigrant groups • Buying power grew by 194% from 1990 to 2003 reaching $653 billion • From 1987 to 1995, business ownership grew 288%!

• Increasing presence in politics: fastest growing and most important voting blocs courted by both parties 2

• • • •

Future Trends

Census Bureau forecasts Latino population will grow 3 times more than national average (20% of population by 2030) Population growth driven by: • Continued immigration rates • Higher fertility rates • Younger population (25.9 median age vs. 35.3 years general population) Economic Impact: as population surges, income expected to rise • Generation Effect: 2 nd generation immigrants will have higher incomes • Current Economic Momentum: closing the income gap over past several years • Low Income Base: have lowest level of groups, so easiest to grow from • Younger Population: more potential for earning, spending, childbearing As income levels increase, higher savings rates are expected in: (1) Health care, (2) Transportation, (3) Homeownership 3

The Wealth Gap Widens

• Federal Reserve’s Survey of Consumer Finances between 1995 and 1998 Net worth of average Latino family dropped 43%, from $5,300 to $3,000 Net worth of average White family increased 25% from $65,200 to $81,700

Net Worth (Assets - Debt) Fluctuations

$90 $80 $70 $60 $50 $40 $30 $20 $10 $0 1995

Year

1998 White Net Worth Latino Net Worth • While Latino families experience income surges and poverty reductions in 1990’s, many lack long term financial security reflected by decrease in net worth • Latinos were only able to accumulate 4% of the wealth of the average White family 4

Bridging the Gap of Economic Disparity

• In White population, income and savings rate are not the only indicators of financial security • Leveraging of existing assets to accumulate other assets • Ex: Equity in inherited real estate or investments used to purchase more assets • Ex: Interest and capital gains used for income generation • Net Worth = Assets – Liabilities • Net Worth can decrease even as income increases due to increased debt (liabilities) and purchases of depreciable assets (cars, clothes, jewelry) instead of appreciable assets (house, investments, etc.) • Since many Latinos are asset poor, savings rates are vital indicators to our financial stability • Need to better understand barriers to savings, banking, and how to improve net worth 5

Barriers to Banking, Savings & Assets

• 2004 Homeownership Alliance Focus Group Study of First Generation Unbanked Latino / Hispanic Immigrants • Sense of Economic Instability • Largest debts: credit card bills, car payments, medical bills • “Right now, I can’t save money. Everything is so expensive, especially

food. I pay $4 for a carton of eggs. Sometimes I say to myself, ‘Wow, these eggs must really be special to cost $4.’”

• Barriers to Opening an Account • Language barrier • “I’m afraid to go into a bank. I am afraid that they might

misunderstand me and what I may need.”

• Fear of bank fees • “Bank fees are my biggest problem when I think of opening a bank

account.”

• “I used to pay bank fees for using certain ATM machines. That’s

stupid…it’s like I’m paying to get my own money out of the bank.”

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Barriers to Banking, Savings & Assets

• Barriers to Opening an Account cont’d • Lack of money for minimum opening deposits • “Saving all of the money for an initial deposit is a big problem for me. I just

don’t have $500 lying around, just waiting to open an account.”

• Lack of proper identification documents • “My first obstacle in opening a bank account is having a social security

number.”

• “I have my foreign IDs, but they don’t accept those.” • Negative banking experience in their countries of origin • “I lost all of my life savings in a bank once. It went bankrupt.” • “In my country, you don’t have the actual amount of money in your bank

account that you may think you do.“

• The “American Dream” of Homeownership • Strong desires to become homeowners, but see it beyond their reach • “While America gives you some advantages, it is more difficult to own a house

in the U.S”

7 • “It’s simple: In Mexico I owned by own home. In America, I do not.”

•

Barriers to Banking, Savings & Assets

Don’t understand how banking history relates to homeownership • Have not been exposed to how credit works or the homeownership process • • Once they make the connection between banking history, credit, and homeownership, they became enthused with opening bank accounts

“I would encourage a person to open an account by saying that it will help them buy a home in the future.”

• Other barriers to homeownership • Low income…low savings • Home sellers prefer to sell to buyers with high cash downpayments • Real estate agents know subsidized loans (IDAs, soft seconds, etc.) take longer to close due to complexity of loan package, therefore discriminate against LMI buyers • High cost of housing • Example: median home price in LA County: $454,000 • Latino families are beginning to purchase duplexes and triplexes with other families • Cultural barriers to Asset-building • Rather pay rent for a home with a backyard than purchase a condo (space vs. equity) • Rather invest in “La Loteria” than in a retirement fund • Seek the wrong advisors: Notary / Tax preparer/ Compadre vs. Attorney / CPA/ CFP • Suffer from the “Who Moved My Cheese?” Syndrome • “My children and social security will take care of me at retirement…why should I save?” 8

• • • • •

Spending Patterns

Spend 93% of pre-tax income (versus 82% U.S average) 10% of income sent abroad via remittances Have lowest: • Health care insurance coverage rates • Homeownership rates • Savings rates of large ethnic groups Current buying patterns: follow low-income groups (1) Rental expense (2) Food (3) Transportation Spending Attitude: Spend now, Save later!

• Prefer immediate gratification: car, clothing, jewelry versus delayed gratification: prefer renting a home with a large backyard, than purchase a condo with potential of building equity through appreciation • Low rates of retirement and long-term investment savings • Prefer tangible versus intangible: lack of insurance 9

Impact of Savings Patterns

% of Pre-tax $'s Spent % Who Save Beyond Retirement % Earning Interest from Savings / Investments Homeownership Rates

Latinos

93% 26% 27% 46.7%

Whites

82% 42% 58% 74.3% • Low savings rates of Latino population has economic impact on nation due to growing segment of population • Even though homeownership rates for Latinos is low compared to Whites, the number of homes purchased by Latinos has increased recently • LA County Recorder reported top 10 surnames of homebuyers are Latino 10

Barriers to Savings

• Lower Income = Lower Savings Rates • Latino median income was $33,000 in 2003 (25% below US median) • More financial dependents than Whites = Less Income to Save • 10% of income (after-tax) sent to families in Latin America • Younger working families supporting older parents • Approximately 30% of Latinos are unbanked; currently using fringe services: check cashers, payday lenders, money remittance • Underutilization of Earned Income Tax Credit (EITC) and Volunteer Income Tax Assistance Program (VITA) • Low Risk Takers = Less Likely to Invest in Stock 11

“There is no such thing as a poor community, rich in people. Our greatest resources and assets are our families.”

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