Younger Households Struggle to Achieve Gains in Net Worth

Newsflash: Americans are acting responsibly.

They are paying down debt, keeping an eye on finances, not splurging on expensive big ticket items they can hardly afford.

The news is largely good - if you are over the age of 35. If you are younger than that, the data suggest that the anecdotal evidence is matched by the economic reality. Research shows that you are, on average 40 percent below where household net worth was before the financial crisis, versus down 3 percent for those over 60.

The issue is that consumers in the younger age groups are more prone to purchase certain types of products than are older people. In a growing economy, people will take on debt which they believe they can repay in order to buy homes, cars, furnishings, clothes and all the other items that mark the establishment of a middle class life. They will build brand loyalties that may last a lifetime, adding margins to to businesses that have invested in those products in services. In sum, this is the time when the future of the consumer economy is forged for and by the next generation.

The biggest concern is that there may be no such thing as catch-up. That the income and associated revenues lost will never be regained. This weakens the enterprises already extant and may thwart the creation of new ones. And people weaned on lessons of hardship are unlikely to indulge themselves if and when times get better. It is hoped that the nascent recovery will eventually 'lift all boats.' But eventually can take a very long time and there are no guarantees, especially when those to whom the future belongs are lagging the rest of the population. JL

Floyd Norris reports in the New York Times:

THE total wealth of American households has recovered from the financial crisis and Great Recession, according to the Federal Reserve Board. But that recovery has not been enough to keep up with inflation, and many Americans, particularly younger adults

The Fed said last week that household wealth rose by $3 trillion in the first quarter, to $70.3 trillion. It was the first time the total exceeded the $68.1 trillion total posted in the third quarter of 2007, before the recession began, and was the largest quarterly increase since 1999, when the stock market was rising rapidly.

In the first quarter, a third of the gain in wealth came directly from rising values of corporate stocks owned by households. That was a little more than the gain attributed to rising real estate values.

The Federal Reserve Bank of St. Louis pointed out that there are more households now than there were in 2007, and that there has been inflation as well. As can be seen in an accompanying chart, the average household wealth at the end of the quarter was $613,635, a figure that is 11 percent below the peak of $689,996 (in 2013 dollars) set in the first quarter of 2007.

Those averages are deceptive, in that they are raised by the high wealth of a relatively small number of households. A very different picture emerges from looking at the median — the level at which half the households are richer and half poorer. That statistic can be calculated from the Fed’s triennial survey of consumer finances. In the studies conducted in the 1990s, the median net wealth was about one-quarter of the average. In the 2000s, the median fell to about one-fifth of the average, and in 2010, it was down to about one-sixth of the average.

During the housing boom, said William R. Emmons, the chief economist of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, “exactly the people you would think need to act conservatively were doing the opposite.” Homeownership rates, and mortgage debt levels, rose for younger households, as well as for less educated and minority ones. Those groups suffered more during the crisis, he said, and have been slower to recover.

Mr. Emmons compiled average wealth figures for different groups from the triennial surveys, and estimated how they have changed since the 2010 survey. The charts also show the results based on age. While all age groups have yet to recover to their 2007 wealth, when adjusted for inflation, older households are down just 3 percent on average, while those headed by middle-age people are down about 10 percent. But the decline is nearly 40 percent for the younger group.

During the housing boom, households ended up with more of their wealth in real estate than before, and mortgage debt rose to record levels relative to the size of the economy. The proportion of wealth in homes is now back to close to the level of the 1990s, but the debt levels remain high by historical standards.