CDFIs Can Help Solve the Wealth Gap and the Affordable Housing Crisis

Is it possible to buy a home, send children to college, or weather emergencies with assets of only $211,450? Likely not, yet that’s the mean net worth of America’s Black families per the latest Federal Reserve survey of consumer finances. Latino families fared slightly better ($227,490) but both cohorts contrasted starkly with white families’ average net worth — $1,367,170.

Fed statistics show the racial wealth gap is massive, persistent and growing. But it can be reduced by supporting community development financial institutions (CDFIs), federally certified entities that offer innovative financial products and programs specifically designed to foster economic opportunity for underserved people and communities excluded from mainstream funding sources. CDFIs develop affordable housing, teach financial literacy, support creative homeownership programs, fund minority small businesses and more.

All CDFI programs target the wealth gap, and can do so more effectively today due to pending federal regulatory changes that will take effect next year that give them flexibility to expand operations beyond their historically mandated geographic boundaries. These changes will allow CDFIs with proven community development models and competitive financial returns to replicate their methods nationwide. This includes New Jersey Community Capital, the CDFI that I lead.

The racial wealth gap is deeply rooted in centuries of systemic discrimination and economic inequities, but it hasn’t always been this massive. It fell dramatically post-Civil War and, until the mid-20th century, Blacks and whites accumulated wealth at similar rates. But post-World War II discrimination, from redlining and segregation to unequal access to education and jobs, put it back on an upward trajectory. Today this divide has serious consequences for Black and brown communities, limiting access to quality housing, health care and education, and suppressing upward mobility.

Ironically, this growing gap exists as U.S. national wealth is also mounting. But white households make up 60 percent of the U.S. population and possess 84 percent of the nation’s wealth, while Black Americans make up 13 percent of the U.S. population yet possess only 4 percent of total wealth. Exacerbating matters, an intergenerational wealth transfer of historic proportions is passing an estimated $57 trillion to 26 percent of America’s Gen Xers and millennials. Only 8 percent of Black families will receive inheritances. 

The growing wealth gap and lack of investment in Black and Latino people, businesses and communities is creating a vicious cycle of poverty, unemployment and poor social services, perpetuating and reinforcing negative outcomes and hurting the American economy. McKinsey found that failing to close the wealth gap could result in lost consumption and investment to the tune of trillions of dollars over a decade.

Affordable housing and homeownership are key to wealth creation. Both offer stable foundations for building financial security and upward mobility by lowering the proportion of income families and individuals spend on rent or mortgages, allowing them to allocate more resources to savings, education and other wealth-building activities. Fiscal stability leads to better health outcomes, higher educational achievement, and ripples out to benefit entire communities.

But our nation’s affordable housing crisis has caused the percentage of income many renters spend on housing to climb precipitously. Those hardest hit are lower-income, disproportionately nonwhite renters. Homeownership is also unattainable for many, yet for generations has been the most proven way to build and preserve wealth. Fed data showed homeowners’ average net worth is 40 times greater than that of renters. Yet just 45 percent of Black and 48 percent of Latino families own their homes compared to 74 percent of white households.

Despite lending to higher-risk borrowers, CDFIs have been triumphant in making loans, getting them repaid, and building financial strength, Citi Foundation reported earlier this year. The promise CDFI products and initiatives hold to mitigate the nation’s rising wealth gap and intensifying affordable housing crisis has increased their numbers, programs and assets under management (AUM). 

Coupled with their track records of driving social impact while delivering competitive financial returns and improved portfolio stability, CDFI-certified entities’ AUM grew from $187 billion to $452 billion in 2023.

In the investment world, returns count. CDFIs’ strong performance and sustainable financial returns, supported by their expertise in high-risk, high-need markets, makes a compelling case for these in diversified portfolios. Given federal regulatory changes allowing the most effective CDFIs to expand their products by type and geography, now is the time to start paying attention to this often-overlooked investment vehicle.

Bernel Hall is president and CEO of New Jersey Community Capital, the largest CDFI in New Jersey.