Fed: Recession robbed net worth of 6 in 10 American families

Credit card debt fell, too, but mainly because of charge-offs

By Martin Merzer

Nearly two of every three American families endured financial damage during the Great Recession. The median American family lost around one-fifth of its net worth. Households that had stock holdings typically saw a third of those investments vaporize.

We each knew it from seeing our own and our friends' real estate values plummet, our investment portfolios crater, our credit card and other debts increase, our sense of financial security tremble and wobble and then collapse.

Now, a comprehensive study conducted by the Federal Reserve Board, reveals the cold, hard statistics of the full panorama of damage sustained by American households. 

"The effects of the recent financial crisis and consequent recession on the household sector as a whole were often starkly apparent and readily measured," the Fed said in its latest Survey of Consumer Finances (SCF), released Thursday. "Although a great deal was known about some economic outcomes for certain subsets of households, a more complete picture for the full range of households was not available."

That is, until now, and this more complete picture is not pretty.

"We already know something about what happened ...," said Jonathan Zinman, associate professor of economics at Dartmouth College, a specialist in household finances and behavioral economics, and a visiting scholar at the Federal Reserve Bank of Philadelphia. "The value added, in a descriptive sense, of [this] micro data is to learn something about who it happened to."

Net worth declines for most
Some highlights -- or, more accurately, lowlights -- of who it happened to:

• A large majority of American families -- 62.5 percent -- saw their net worth decline between 2007, when the recession began, and late 2009, when the recession technically ended (though economic pain certainly hasn't ceased for many families). "From 2007 to 2009, wealth declined for most families ... and it declined very substantially for some," the report said.
• Median net worth of all American families plunged from $125,400 in 2007 to $96,000 in late 2009. Net worth was determined by subtracting the value of liabilities such as mortgages, credit card debts and car loans from the value of assets such as stock portfolios, retirement and other savings accounts, vehicles and remaining home values. (The term "median" refers to the point between the higher half and the lower half of a set of numbers.) "The shocks to household wealth associated with the most recent recession were extraordinary by any measure...," Federal Reserve Board Gov. Elizabeth Duke told a group of Virginia economists on Thursday. "The initial shocks to housing and to financial assets wiped out most of the wealth gains realized since the aftermath of the tech crash in 2001."
• Some families managed to wean themselves off their dependence on credit cards, but those who remained at least somewhat dependent on credit cards dug even deeper holes for themselves. Nearly 48 percent of American families reported credit card debt in 2007, a number that was reduced to 43.2 percent in 2009. But the median credit card balance rose to $3,300 in 2009 from $3,100 in 2007.
• Americans in the middle range of incomes were far more likely to be carrying credit card debt than low income or high income people. More than half of those in the 40th to 80th income percentiles still had credit card balances in 2009, compared to 28 percent of the poorest Americans and 32 percent of the richest Americans. But the richest Americans carried the highest median balances -- $9,300, up considerably from $7,200 in 2007.
• Younger adults and the middle aged were far more likely to find themselves in credit card debt than the elderly. In addition, couples with children were far more likely (52 percent) to have credit card balances than members of other households, though couples without children had the highest median balances -- $4,000 in 2009. Interestingly, 43 percent of those with college degrees were in debt to credit card issuers, compared with only 29 percent of all high school dropouts. College graduates also had the highest balances -- $5,500 in 2009 compared to $1,500 for those without high school diplomas.
• Mixed news arrived about total debt -- the accumulation of mortgages, credit card balances, installment loans, etc. The percentage of families carrying any form of debt fell from 79.7 percent to 77.5 percent. This would seem to be good news, though experts detected a deeper, more troubling message -- many people simply walked away from their debts, severely damaging their credit scores.
• While overall consumer debt outstanding has declined since the start of the recession, this has mainly been due to the charge-off of bad debt," said economist Cristian deRitis, director of credit analytics for Moody's Economy.com in West Chester, Pa.
• And for those households still carrying debt, the total loads increased. In 2007, the median level of household debt stood at $70,300. By the end of 2009, it was up to $75,600. "The SCF data suggest that households that managed to avoid default continue to struggle to manage their balance sheets," deRitis said.
• With so many people out of work and so much competition for the remaining jobs, earned income actually declined, along with pretty much everything else. Real median household income fell from $50,100 to $49,800.
• Households that held stocks in their portfolios lost one-third of their shirts. In 2007, the median value of those portfolios stood at $18,500; by the end of 2009, those values had collapsed to $12,000. It was just a little less awful for bondholders -- those values dropped from $62,100 to $50,000.
• Interestingly, American households did not lose faith in stocks and bonds. Reflecting a national trend of improved rates of savings, the percentage of families holding stocks rose slightly to 18.5 percent in 2009 from 18.4 percent in 2007; the percentage of those holding bonds rose to 2.6 percent from 1.7 percent.

The report, "Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009," represented a notable alteration of tradition for the Federal Reserve.

Previously, the Fed has produced an extremely detailed survey of American household finances every three years. The last version was completed in early 2008 and released in 2010, based largely on the economic conditions that prevailed during the second half of 2007, just as the economy was beginning to tank.

And tank it did. By the end of 2008, unemployment was increasing, economic output was falling, banks were failing, house prices already had declined by 17 percent and the broad-based Wilshire 5000 stock index had fallen by 39 percent.

Normally, the Fed would not begin its next survey until 2010. But, given the extraordinary circumstances, it accelerated the schedule and began work on a follow-up survey in July 2009. More than 4,000 respondents from 2007 were thoroughly re-interviewed during sessions that lasted as long as 90 minutes. After many months of data crunching, the results were released Thursday.

"Taken together, the information from the pairs of interviews from the two years provides a unique basis for measuring how families were affected," the authors said.

Duke, one of six members of the Federal Reserve Board, introduced the survey during her speech Thursday to the Virginia Association of Economists in Richmond.

"The SCF is the premier source of micro-level information on the finances of American families ...," she told the group.  "Although we are only beginning to mine the data, I believe the richer understanding of individual circumstances provided by the data set will prove invaluable in its ability to help us understand how consumers are approaching a number of important decisions, such as spending, saving and wealth accumulation."

Digging through that data, one finds many interesting nuggets:

• People in the West lost the most ground, with the median family there seeing 27.7 percent of its household wealth disappear. The other geographic breakdowns: South, 17.7 percent; Midwest, 17.5 percent; Northeast, 9.5 percent.
• Due to the collapse of real estate values, the median homeowner lost 19 percent of his or her wealth, while the renter lost 8.7 percent. This provides conclusive evidence of a generally regarded truth about the Great Recession: "The bulk of the reported decline in wealth is due to house price declines," deRitis said.
• The Great Recession was an equal opportunity horror, education-wise. Regardless of your educational achievement -- high school dropout to college graduate -- you were likely to have lost 17 percent to 19 percent of your net worth.
• Most people simply stood by and watched that horror unfold. The Federal Reserve found that families, by and large, didn't substantially alter their portfolios or otherwise change their financial situation. The stock market and the rest of the meltdown changed it for them. "On the whole, changes in wealth appear to stem from changes in asset values more so than changes in the compositions of families' portfolios or their outstanding debt," the Fed reported, "though, again, the results vary across households."
• As one would expect, some families managed to come out of the recession in better shape than they went in, though patterns were difficult to discern. "Although over 60 percent of families saw their wealth decline over the two-year period, a sizable fraction of households experienced gains in wealth, while some families' financial situation changed little, at least on net," the report found. "The shifts in wealth do not appear to be correlated in a simple way with families' characteristics."

Said deRitis: "All of the data points to a polarized economic recovery. Households that have managed to hang on to their jobs and make it through the recession relatively unscathed have continued to have access to credit and have had some financial flexibility to increase savings and pare back expenses. Other households that had stretched their spending and have experienced a reduction in income have been largely cut off from the credit markets, making it much more difficult for them to repair their balance sheets." 

Silver lining?
There was a bit of good news, though even that silver lining contained a cloud.

Utterly terrified by the worst economic downturn since the Great Depression, their faith in a better future significantly shaken, vast numbers of Americans finally began taking matters into their own hands by saving for that future.

The U.S. personal savings rate, around 2 percent when the recession began and barely 1 percent in 2005, rose to more than 5 percent at the end of last year, according to the U.S. Bureau of Economic Analysis. That's a good thing, on the personal level, but it could complicate the current, nascent economic recovery.

The reason: Money sacked away in savings accounts, certificates of deposit and so on cannot be used -- putting it crassly --  to buy stuff. Stuff that people can be hired to make and sell.

The report noted "the perceived desire for additional savings" but also noted this: "The data show signs that families' behavior may act in some ways as a brake on reviving the economy in the short run."

Outside economists agreed.

"As with all economic activity, we need to strike a balance," deRitis said. "Too much consumption can lead to an unsustainable economic bubble. Too much saving can lead to the 'Paradox of Threat,' wherein virtuous individuals create a lack of aggregate demand."

One of many lingering questions: If we stipulate that many Americans learned their lesson and are now saving more, how long will the lesson be remembered?

"Did people learn something from the meltdown that will change their behavior over the medium- or long-haul?" Zinman asked. "If not learning, per se, maybe people are now more attentive to their finances? These are all open questions and areas of very active and exciting research."

See related: Frugality: Just a fad? Or will consumers keep saving post-recesssion?, Forecasters weigh in on the new frugality, Consumer credit card balances drop in January, Recession still hurting saving, retirement funds, Fed report: Consumer credit card balances keep plummeting

Published: March 25, 2011

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