Financial Time Travel: 18 years in 5

by JT McGee

I posted an article about bailing out Main Street on Monday because I knew a new net worth report was just around the corner.

Updated once every three years, the new data from the 2010 report released in 2012 shows that American household net worth has plummeted since 2007. CNN says it better than I can:

The stunning drop in median net worth — from $126,400 in 2007 to $77,300 in 2010 — indicates that the recession wiped away 18 years of savings and investment by families.


Back to 1992

American median net worth fell back to a level not seen since 1992. The Federal Reserve stated in its report that the majority of the decline is due to housing. Housing prices peaked right around the 2007 measure, and have fallen further even from the 2010 recording.

Theoretically, houses should be more valuable today than they are right now. American housing is significantly undervalued on a historical price-to-rent basis. Low rates should boost demand, but it’s quite difficult to boost demand to a point equal to the pre-burst fallout. Without resurgence in negative amortization loans and super-relaxed lending standards, it simply will not happen.

We’re essentially experiencing a full-circle event with asset-liability mismatches, which was the focus of the middle class bailout post. Most Americans are holding assets worth less than the liabilities on their balance sheets. So if we even out the mismatch, as we did with institutions, then maybe we’ll see a real recovery.

Other Interesting Tidbits

I found these two charts to be very interesting. First, it’s interesting to see that fewer people are interested in saving for education or home ownership. Of course, it’s not particularly surprising, but it just confirms what someone would expect.

Then there is this, a chart of “asset allocation” by net worth. Look to the relationship between greater net worth and stock exposure. (Something about the rich getting richer goes here.)

If you’d like to read the full report (print it out and find the nearest hammock), you can find it here.

Just to get people riled up…

{ 4 comments… read them below or add one }

Jonathan June 13, 2012 at 10:44

“It’s interesting to see that fewer people are interested in saving for education or home ownership.” Well consider that a large percentage of the population doesn’t need to save for education (no kids, kids are grown, or kids are too dumb to go to college) or a home (already homeowners or have decided they prefer renting). All the rest of the items on that list except for retirement savings (some people are already retired) are things that pretty much everyone should save for.

And as I posted on Financial Samurai yesterday, the “net worth drop” report is way overblown – sure the market tanked after 2007, and in 2009-2010 people were freaked out at their retirement account values. Today those accounts have pretty much fully recovered to 2007 levels. People’s home values are another story as they have not recovered, but regardless, for the media to go into hysterics pointing at how bad people are doing based on a report that only goes to 2010…


JT June 13, 2012 at 12:37

Keep in mind that these are aggregated answers, so the change from one category to another over time is pretty important. There wasn’t that large of a demographic change from 2001 to 2010 that education savings, for example, would decline by roughly 30%.

Yeah, I think the report isn’t as reliable as it should be. As of end of year 2010, the S&P ex-dividends was down roughly 12%, so even then in 2010 most people had recovered. Rates dropped like crazy, so any fixed income investments during that period should have been up wildly.

Anyway, I think the biggest problem is that the people who could least afford to lose a ton of net worth lost it in the downturn. I mean, we’re talking about people who should have never, ever become homeowners who are now on the hook for $100k homes with $300k principal mortgages. That’s the biggest deal, IMO.


JT June 13, 2012 at 12:44

For what it’s worth, I think the next 10 years will be exceptional for middle American net worth gains. When housing recovers, the flood gates open for equity-fueled consumption.


tophatmoney June 15, 2012 at 06:57

seems what these numbers (reasons for saving) show is that as the cost of living rises and incomes stay the same or even drop people are forced to reign in what they are saving for. Savings become for much more immediate things, so more people are saving for liquidity, purchases and the family (all living costs right?) and fewer people are saving for college, buying a house, retirement. These things are further off, saving for them becomes a luxury, saving for immediate needs becomes a necessity.


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