The Economist: Family finances
By Ray Perryman
June 16, 2012 at 1:16 a.m.
The Federal Reserve just released a report regarding changes in U.S. family finances from 2007 to 2010. Based on the Survey of Consumer Finances for 2010, some of the findings from the analysis were (not surprisingly) rather bleak. You may have seen the headlines.
One statistic that has been widely quoted is that between 2007-10, median family net worth fell by almost 39 percent, while the mean fell by almost 15 percent. This drop reversed the 2004-07 trend of rising net worth for most groups (The median is the level at which half of all families have a higher net worth and half have a lower net worth, and the mean is the average calculated in the usual way).
The survey breaks results down by income level (percentile groups), age, family structure, education and race/ethnicity. While net worth was down for most demographic groups, the pattern was somewhat uneven.
Median net worth decreased across all income groups except the top 10 percent, where it was essentially unchanged. The mean, however, fell across all categories except the lowest 20 percent of people, where net worth actually rose by nearly 6 percent.
And for the Top 10 percent income level, mean net worth was down more than 15 percent. Looking at age groups, net worth was down (both median and mean) for all groups except for those aged 75 and older.
The major reason for these declines was the housing market crash. The decline in net worth was most pronounced in groups where housing was a larger share of assets, such as those headed by a person 35-44 years old and those in the West region.
It is important to note that as important as housing was to the decline in net worth, it was equally a factor in prior gains. Without a doubt, the 2007 net worth figures reflect overheated real estate markets in some areas. As housing values dropped, families in these former hotspots were often hit hardest.
The survey also tracked income, and found that over the 2007-10 timeframe, the median value of real (inflation-adjusted) income fell by almost 8 percent. Median income had also fallen slightly between 2004 and 2007 (though mean income rose).
More highly educated families were among the biggest losers; the decline in mean income was most pronounced in the Top 10 percent of the income distribution (down more than 16 percent).
Declines in income were realized in most demographic groups with two notable exceptions. The lowest quintile in terms of income actually experienced an increase between 2007-10, while all other groups' levels fell by significant amounts. Every age group younger than 55 saw declines in median income in the range of 10 percent; the income of those aged 55-64 also dropped (though by a smaller amount).
However, families headed by a person aged 65 or older actually saw median income rise (though the mean dropped significantly). Another group with rising income was those headed by persons who were not working (but not retired).
So what are the key conclusions we can draw? Without a doubt, declines in net worth and income from 2007 to 2010 wreaked havoc on many families across the country, particularly in areas where the housing market was particularly volatile.
The fact that more than 74 percent of family debt was secured by a primary residence during the period is indicative of the types of issues that arose all too frequently (debt exceeding home value in the face of falling incomes). Persons with investments of other types (such as equity in a business) were also negatively affected.
The fallout for people unlikely to have houses or investments (those at lower income levels and the youngest age ranges) was muted. Retirees were also relatively less harmed in terms of median income (though the mean fell notably).
Going forward, the fact that the large declines in net worth have already been realized will work to improve the picture we get on the next survey, which will cover 2010-13 and probably won't be released for years afterward.
Also helpful is the fact that credit card balances declined for most groups and more people reported paying off balances in full each month. Housing markets in many areas are recovering (though slowly) and net worth data over time will reflect that rise. Lower credit card debt burdens are also a good thing.
It's disheartening to think of the tremendous loss in wealth the United States experienced during the recent recession. The next few years will likely indicate rising wealth as we work our way back up from the trough.
Even so, it will likely be much longer before the prior peak is reached. At least we can say with some degree of confidence that the bottom has been reached and brighter days are almost surely ahead.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.