Big Drop in Households’ Net Worth

Study Shows Big Drop in Households’ Net Worth

The leap in wealth that Americans thought they were enjoying over the past several years has already turned out to be a mirage, according to new estimates by the Federal Reserve.

In its triennial survey of consumer finances, the Fed found that the median net worth of American households increased by a seemingly healthy 17 percent between the end of 2004 and the end of 2007.

But those gains were entirely wiped out by the collapse in both housing and stock prices last year. Adjusting for those declines, Fed officials estimated that the median family was 3.2 percent poorer as of October 2008 than it was at the end of 2004. The new survey offers one of the first glimpses of how American families were positioned financially as the roof fell in on the economy, and it provides some sense of how much wealth has been destroyed since then. Indeed, the destruction of wealth is still in full swing: housing prices are still falling, more than two years after the bubble peaked.

The survey suggests that the boom years were not all that wonderful even before the crisis set in. And it suggests that many households will have to drastically increase their savings rates, which were below 1 percent, to make up for some of the lost wealth.

Adjusted for inflation, the median household income actually edged down slightly over the three years ending in 2007. The mean household income, a measure that is more clustered around incomes in the middle, jumped by a respectable 8.5 percent.

But a growing share of that income came from investment profits rather than from wages and salaries. And the wealth that Americans were building up came overwhelmingly in the form of paper profits that vanished as quickly as they had come.

Fed analysts estimated that 35.8 percent of the average family’s assets in 2007 were in “unrecognized capital gains,” such as gains in the market value of homes that people had yet to sell. Slightly more than half of those unrecognized gains came from real estate, and the second biggest source was increases in the value of business assets.

The Fed’s estimates, which are based on a survey of 4,422 households, are in line with estimates that economists have made about the aggregate plunge in wealth since the housing bubble began to deflate in 2006.

Dean Baker, co-director of the Center for Economic Policy Research, estimated that the United States has lost about $6 trillion in housing wealth since the peak of the bubble. The Case-Shiller index of home prices in 20 major cities, considered one of the most accurate barometers of home prices, has declined about 25 percent since mid-2006. On top of that, Mr. Baker estimated, another $6 trillion or so has evaporated as a result of the plummeting stock market, for a total loss of $12 trillion since 2006.

“I’m actually surprised that you didn’t see higher values on stock holdings,” Mr. Baker said, noting that the median value of household stocks, adjusted for inflation, was slightly lower in 2007 than it was in 2001.

“Even when we were near the peak of the bubble, things didn’t look that good — and they’re looking worse today,” Mr. Baker said.

By EDMUND L. ANDREWS

http://www.nytimes.com