U.S. Wealth Fell 38.8% in 2007-2010

A Federal Reserve study showed that the financial crisis wiped out 18 years of gains for the median U.S. household net worth, with a 38.8% drop from 2007-2010 primarily due to the collapse in home prices. Median net worth dropped to $77,300 in 2010, which was the lowest since 1992. It was $126,400 in 2007.

Mean net worth fell 14.7% to a nine year low of $498,800 from $584,600, according to the Fed. Almost every demographic group experienced losses. Fed economists said this could hurt retirement prospects for middle-class families.  The drops in household wealth during one of the longest and deepest recessions since the Great Depression has slowed consumer spending, which makes up about 70% of the economy.

The Fed has already taken unprecedented steps to boost the economy as it has battled the 18 month recession, which statistically ended in June of 2009. The Fed cut its key interest rate to nearly zero and purchased $2.3 trillion in debt to lower long-term borrowing costs.  Still, the unemployment rate has stayed above 8% since February of 2009, compared with the Fed's long-range goal of 4.9%-6%.

The Fed economists wrote, "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." The S&P/Case-Shiller U.S. Home Price Index fell 23% in the three years through December of 2010. The Standard & Poor's 500 Index also lost 14% during that time period.

The proportion of families with retirement accounts decreased 2.6 points to 50.4% during that period, wiping out most of the 3.1% increase over the prior three years, according to the report. The Fed economists noted, "the most noticeable drops in ownership were among families in the middle-income, middle-wealth, and middle-age groups. Retirement accounts had been growing in importance as a supplement to Social Security and other types of retirement income, and the decrease in ownership in the past three years may represent a setback."

The U.S. did add 69,000 jobs in May. However, the economy grew more slowly in the first quarter than previously estimated, expanding at a 1.9% annual rate, down from the prior 2.2% estimate. Declines in average income were the greatest in the wealthiest 10% of families and for higher education or wealth groups according to the survey.

The housing slump and financial crisis also boosted the dependence on wages as a percentile of net worth for the wealthiest 10%. The top 10% by wealth got 55.8% of their pre-tax family income from wages in 2010, up from 46.2% in 2007, according to the survey. The portion earned from capital gains fell from 14.4% to 2.3%.

Debt as a share of family assets rose to 16.4% from 14.8% as asset values declined, according to the Fed. For those households with zero debt in 2010, the median value of debt was unchanged from 2007, while the share of families having debt fell to about 75% from 77%. Debt payments more than 60 days overdue were reported by 10.8% of families in 2010, up from 7.1% in the last survey in 2007.

The Fed said, "measures of debt payments relative to income might have been expected to increase. In fact, total payments relative to total income increased only slightly, and the median of payments relative to income among families with debt fell after having risen between 2004 and 2007. The share of families with high payments relative to their incomes also fell after rising substantially between 2001 and 2007."

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