You’ve probably seen the headline version: “U.S. families see prosperity plunge” is how this morning’s AJC front page puts it. And unfortunately, “plunge” is an accurate term.
The median American family — the mythical family at the dead center of the U.S. economy, with half of families being richer and half being poorer — saw its net worth plunge from $126,400 in September of 2007 to just $77,300 in September of 2010, a decline of $49,100 in perceived wealth in just three years’ time.
Again, “perceived” wealth is the accurate term. Much of that net worth came in the form of rapidly increasing home values, a rise that ended right about the time that the 2007 survey by the Federal Reserve was being conducted. And as we know, it wasn’t just homeowners or Fed survey-takers who perceived that home value as real wealth that could be counted upon and even spent. So did credit-card companies, banks, mortgage lenders, security brokers, Wall Street, purchasers of credit default obligations and federal regulators.
When the bubble burst, everybody who had counted upon that false wealth being real took a hit. But nobody took a harder hit than the homeowner. According to one recent study, almost a third of all homeowners with a mortgage now owe their lenders more than the home is worth, which means their property reduces rather than enhances their net worth.
It’s no secret what happens when millions of people suddenly discover that they are several tens of thousands of dollars more poor than they thought. They stop spending and buying. When they stop spending and buying, companies start laying people off. When companies start laying people off, net worth plummets even deeper, and a destructive cycle begins.
Some of the lost wealth reflected above has been recovered since the most recent Fed survey was taken in September 2010. By then, the Dow Jones average had recovered some but not all of its previous value and stood at roughly 10,500. Today it’s at roughly 12,400, depending on how the market takes the news out of Europe.
And as usual, the decline in net worth was not felt equally across all income groups, as the chart below indicates. Because of the scales involved, net worth of families in the bottom 20 percent of incomes don’t show up well, but they fell by roughly a third between 2001 and 2010. However, the biggest hit was experienced by those in the 60-to-90 percent income groups, essentially the upper middle class. They were most likely to have a lot of their wealth tied up in their homes, and because they make a good amount of money and spend most of what they make, they also tend to be the group that drives a consumer economy.
– Jay Bookman