The US Federal Reserve today released its triennial examination of incomes and net worth of American households in the Survey of Consumer Finances. It shows the crushing effects on net worth of a housing and financial bust unparalleled since the great depression.
The shocking results of this study overviewed in the New York Times are that ALL real net wealth gains for the median household since 1992 were erased by 2010. Net worth for the median American family plummeted from $126,400 in 2007 to $77,300 in 2010 ($2010), or 39%. Almost two decades of progress for middle income Americans has been expunged from history. Falling house prices were the primary driver of this devastating blow to household net worth. As such households with heads between 35-44 were most heavily hit. However, median debt stayed relatively constant between 2007 and 2010 showing how precarious household finances are when the assets side of net worth is based on bubble level housing prices. If the value of the asset side collapses, the debt side remains.
The top 10% of the income and net worth distribution saw relatively little change in their medians between 2007 and 2010, likely owing to the recovery of stock market values by 2010 from their 2009 lows.
Earnings also dropped for the median household between 2007 and 2010, although by a smaller 7.7%, compounding the loss in net wealth.
There are plenty of other factoids in the US Fed Report. Readers of this blog likely won’t be surprised to some degree that the housing collapse in the US had such a significant effect on the middle class. However, the grim details of what happened in the US should serve as a cautionary tale to us Canadians where middle class net worth is similarly premised on bubble level housing prices supported by historically high debt to income ratios, fuelled by lax mortgage insurance rules and record low mortgage rates.
I’ve said for some time, if we’re not careful an American style meltdown can happen again right here in Canada. We’ve experienced bubbles popping before both in Toronto in 1989 and Vancouver in 1994. Just because the last time it happened was almost 20 years ago, doesn’t mean it won’t happen again in the near future with devastating impacts to the middle class and driving a further wedge between the rich and the rest of us.