And it's about to get worse...

Net Worth of American Family Falls 40% In 3 Years

Ylan Q. Mui

The net worth of the American family has fallen to its lowest level in two decades, according to government data released Monday, driven by a more than 40 percent drop in their stakes in their homes.

The Federal Reserve’s detailed survey of consumer finances showed families’ median wealth plunged from $126,400 in 2007 to $77,300 in 2010 — a 39 percent decline. That put them on par with median wealth in 1992.

The Fed’s data underscore the depth of the wounds of the Great Recession and how far many families remain from healing. The median value of Americans’ debt did not change between 2007 and 2010. Meanwhile, the housing market crash inflicted particularly severe damage, with the Fed showing that the median value of Americans’ equity in their homes plunged 42.3 percent between 2007 and 2010.

The survey is conducted every three years, and this report offers one of the most exhaustive looks to date at the greatest economic upheaval in a generation. Although there have been some signs that the recovery has picked up steam — housing prices have begun to stabilize and unemployment has fallen — Fed economists said those improvements largely do not change the survey results.

The implosion of the housing market inflicted much of the pain. The value of Americans’ stake in their homes fell by 42 percent in those three years to just $55,000. The poorest families suffered the biggest loss of wealth from the drop in real estate prices. But middle-class Americans rely on housing for a larger part of their net worth. For some, it accounts for just over half of their assets. That means every step downward is felt more acutely.

Rakesh Kochhar, an economist at the Pew Research Center, calls this phenomenon the ”reverse wealth effect.” As consumers watched the value of their homes rise during the boom, they felt more confident in spending more money even if they did not actually cash in on the gains. Now, the moribund housing market has made many Americans wary of spending, even if their losses are just on paper.

According to the Fed survey, that paper wealth — or what is officially called unrealized capital gains — shrunk 11 percent to about a quarter of American’s assets.

The findings track research Kochhar released last year that showed a dramatic drop in household wealth during the recession, particularly among minorities. That study found record high disparities in wealth between whites and blacks and Hispanics.

“It was turning the clock back quite a bit,” Kochhar said.

Link:
http://www.washingtonpost.com/business/economy/fed-americans-wealth-dropped-40-percent/2012/06/11/gJQAlIsCVV_story.html