US family finances, 2007-2010

Early this week the Fed released a report on its triennial survey of consumer finances.  The 80-page, densely written document covers the period from 2007-2010–the heart of the Great Recession.  The main conclusions, as I see them:

income

After remaining flattish over the earlier part of the decade, median (that is, list incomes in size order and pick the middle one) family income in the US fell by 7.7% to $45,800 during 20070-2010.

For the 40% of families headed by a person aged 55 or older, however, median income actually rose during the period.

The decline in income was especially sharp for highly educated families, and for those living in the South or West.

Mean income (that is, add incomes all up and divide by the number of families) dropped by 11.1%, meaning that higher than average incomes dropped the most.  The highest-income 10% of families was hit the hardest, as were the best educated and wealthiest.  So, too, the self-employed, who tend to be the highest compensated Americans.  Oddly, income for high school dropouts–not a group anyone would wish to be in–was up a bit during the period.

Median incomes were unchanged in the East and Midwest, but fell sharply in the South and West.  This reversed the pattern of relative prosperity during the first part of the decade.

wealth

This is where the substantial economic damage was done.  Median family net worth fell by 38.8% over the three years.  Mean net worth dropped by 14.7%–implying that the wealthier were hit less hard than ordinary people.

Who was hurt the worst?  …those with most of their money tied up in highly mortgaged housing–typically families headed by someone 35-44–and those living in areas where the bubble was biggest and the collapse greatest (the South and the West).  Median net worth for 35-44 households fell by 54.4% and for families in the West by 55.3%.

In urban areas, the fall in net worth caused by the housing crisis was enough to close most of the widening wealth gap between haves and have nots which had emerged over the past 20 years.

Two anomalies:

–net worth for families headed by someone aged 75+ rose slightly

–median net worth for renters (who tend to have relatively low net worth) fell by a mere $300 between 2007 and 2010, compared with a $71,500 plunge for homeowners.

financial leverage

Net worth, of course, is net in the sense that it’s the value of assets minus the value of liabilities.  Over 2007-2010, family asset values dropped by 19.3%.  Debt stayed basically unchanged.  The negative effect of financial leverage, mostly home mortgages, is what turned the fall in asset value into a decline in net worth of twice the size.

For the worst-off decile, the fall in house prices has pushed net worth into the minus column.

my take

The decline in net worth for middle-income Americans is eye-popping.  And that’s what has caught all the media attention.  But that’s the past.  It makes for interesting cocktail party conversation, but little else.

If we look at the situation as an investment problem, the main issue is that many people placed a big, highly leveraged bet on residential real estate. It hasn’t worked out.  Carrying costs aren’t the main worry, given the dramatic decline in interest rates.  Rather, it’s how holders of too much real estate extract themselves from a highly illiquid asset and redeploy their money into something more economically productive.

The Fed data are from 18 months ago.  Over recent months, the housing market in places like Miami, southern California and Arizona has shown signs of stabilizing.  So properties may be salable for the first time in several years. The more astute or pragmatic should have started to reposition themselves already, which should imply gradually better economic performance over the coming year.

One other thing.  I’m struck by the Fed’s table showing median and mean income for families by age of head of household.  Here are the figures:

less than 35          median income = $35,100       mean income = $47,700          median net worth = $9,300

35-44          median = $53,900     mean = $81,000          median net worth = $42,100

45-54          median = $61,000     mean = $102,200          median net worth = $117,900

55-64          median = $55,100     mean = $105,800         median net worth = $179,400

65-74          median – $42,700     mean = $75,800          median net worth = $206,700

75 and over          median =$29,100     mean = $46,100          median net worth = $216,800.

Average net worth for those approaching retirement age is $880,500.  But half have saved less than $200,000.  That isn’t a lot to live on if you expect (as you should) to live another 25 years.