Federal Reserve Highlights Widespread Declines in Families' Wealth

The Federal Reserve has released the most recent Survey of Consumer Finances (SCF) [pdf here] which covers 2007 through 2010 and presents additional evidence of the decline in both income and wealth during the recent recession. The report shows that American families’ median net worth fell from $126,400 in 2007 to $77,300 in 2010, representing a 40% drop.

SCF data support and are consistent with one of the key findings of our Assets Report Infographic. Data we relied on from Pew shows that between 2005 and 2009 black and Latino households saw disproportionate declines in their wealth, due in large part to the decline of their home values in the face of the housing crisis. This recent blogpost of ours looked at the role housing wealth plays in exacerbating the racial wealth gap. However even excluding the value of homes and mortgage debt, median net worth still declined from $42,300 in 2007 to $29,800 in 2010. The modest gains families of color had made between 2001 and 2007 in median net worth according to SCF data were reversed by the economic crisis.

The economic conditions of the recession did not spare renters either (whose wealth did not lie in housing). Median income for homeowners and renters fell between 2007 and 2010, but the decrease for renters was greater (10.3% decrease vs. 7.7% for homeowners). While some have suggested that the loss of housing wealth is merely "paper wealth" (due to the bubble created by inflated home values), these statistics show the impact of the housing crisis on the well-being of ordinary Americans.

Geography also played a role in how families fared. For example, in 2007 families living in the West and Northeast had similar median net worth: $167,100 and $164,100 respectively. In 2010, median net worth in the West had plummeted to $73,400 while Northeastern families had a median of $119,900.  

Difficult economic conditions and income variability had an impact on families’ reported ability to save and plan for the future. The percent of families who said they did not have a good idea of what their income would be for the next year increased in the study period, while the percent of families saying they had saved money declined from 56.4% to 52%. (That might not sound like too big of a drop, but the Fed notes that this is the lowest level of self-reported saving since the SCF began asking this question in 1992.)

When asked why they were saving in 2010, families were most likely to respond that liquidity (assets that can be easily converted to cash) was the most important reason for saving, inching ahead of retirement, and well ahead of education and homeownership. The graph below illustrates these savings priorities and demonstrates that the need for immediate, spendable funds drives savings goals for many Americans. (Click on the graph for a larger image). 

The growth of precautionary and emergency savings as a priority during and since the recession suggests an ongoing need for easily accessible and affordable savings products for people across the income spectrum. Financial products that help families plan for their immediate and mid-term needs, make necessary daily purchases and maintain their families' quality of life are critical for families of all incomes but especially those with less financial stability.

In the long term, the U.S. needs to do a better job at investing in the economic security of families with lower incomes and less wealth. Currently, our country's asset building policies overwhelmingly target higher income and higher wealth Americans. However, improving the balance sheets of families at the bottom of the income and wealth ladder would have important and beneficial consequences for the economy as a whole. As Senate Testimony from Ray Boshara (our founding director, now at the Federal Reserve Bank of St. Louis) articulates "weak balance sheets impact economic growth. Weak balance sheets—especially due to lower household wealth—have had negative “wealth effects” on the economy."

For more news coverage on the SCF data, check out NPR's round up of news items on the report. The Wall Street Journal notes that while these data are not surprising, they add credence to “the notion that our post-financial-crisis world is not one we will exit easily.” That's not to say that there's nothing we can do to reverse or at least mitigate the impact of such a sharp decline in families' wealth. Derek Thompson of The Atlantic shares a few of his ideas for what we could be considering as the economy recovers. Jared Bernstein from the Center on Budget and Policy Priorities has more over at Salon. At a minimum, we need policymakers actively considering ways to make it easier for families to save and build assets, examining the ongoing role housing can play in creating or undermining security, addressing persistent racial inequality, and understanding the financial needs of low and middle income and wealth households.