While the American public was bailing out Wall Street, those same taxpayers saw their families’ net worth decline by nearly 40 percent. The recession took roughly 20 years of Americans’ wealth, according to government data, with middle-class families faring the worst. According to the Federal Reserve, the median net worth of families plummeted by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That means that American families median worth has reverted to 1992 levels.
The study is one of the most comprehensive examinations of how the economic downturn altered family finances. Over three short years, Americans watched progress that took a generation to accumulate fade away. The dream of retirement that relied on the expected rise of the stock market proved deceptive. Homeownership, once viewed as a source of wealth, became a burden because the market collapsed. The findings emphasize how deep the wounds of the financial crisis are and how healing is impossible for many families. If the recession set Americans back 20 years, economists say, the road ahead is certain to be a long one. And so far, the country has experienced only a halting recovery. “It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in free fall.”
Net worth is defined as the value of assets like homes, bank accounts and stocks, minus mortgage and credit card debt. The Fed found that median home equity declined from $95,300 in 2007 to $55,000 in 2010, a 42.3 percent drop. Home equity is defined as the home’s value minus how much is owed on the mortgage. According to the Fed, median incomes fell from $49,600 in 2007 to $45,800 in 2010, a 7.7 percent drop.
Additionally incomes fell the most among middle-class families. The wealthiest 10 percent saw their median income decline 1.4 percent over the three years, while families in the second and third quartiles experienced a drop of 12.1 percent and 7.7 percent. The lowest-income Americans saw their paychecks fall by 3.7 percent. Families were less confident about how much income they could expect in the future. In 2010, slightly more than 35 percent said they did not “have a good idea of what their income would be for the next year,” an increase over the 31.4 percent reported in 2007.
“Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices,” according to the Fed. The survey’s findings cast a harsh light on the damage done to the economy by the recession and which helps to explain the exasperatingly slow pace of recovery. The housing market’s collapse was at the core of the recession, during which the economy contracted approximately 5.1 percent between the 3rd quarter of 2007 and the 2nd quarter of 2009, and the unemployment rate soared 4.5 percent to 9.5 percent. “Housing was of greater importance than financial assets for the wealth position of most families,” the Fed said. “A substantial part of the declines observed in net worth over the 2007-10 period can be associated with decreases in the level of unrealized capital gains on families’ assets.”
Incomes improved in late 2011 but have begun falling again this year, said Gordon Green, cofounder of Sentier Research. The decline is larger and more unrelenting than in the recovery after the 2000 recession, when family incomes returned to previous levels within 18 months, Green said. “Incomes went down more during two years of this recovery than during the recession itself,” he said. “I don’t think we’ve seen anything like this.”
The impact a given family felt depended on where they live, how much they earn and what kind of investments they had, said Scott Hoyt, an economist at Moody’s. “Richer people owned more bonds that didn’t get killed,” Hoyt said. “For middle-income households, their primary asset is their house at the low end and the government stimulus backstopped incomes.”
Household net worth reached a high point of $66 trillion before the recession hit in December 2007 and sank to just $54 trillion in 2008, according to the Fed. It was $63 trillion in the 1st quarter this year, but that doesn’t reflect the stock market’s volatility since then. The Fed estimates Americans lost $7 trillion in home equity because of the housing bust that followed a significant increase in mortgage defaults after 2006.