Fed survey shows widespread increases in net worth preceded the current financial crisis

Family net worth—the difference between the assets a family owns and the debts it owes—is a critical indicator of family financial well-being. Families with more net worth can afford a higher level of consumption, and even modest amounts of net worth can stabilize families of limited means by helping them cope with unexpected expenses or temporary income declines. The accumulation of net financial and nonfinancial assets by families of modest means is also an indicator of their integration into the mainstream of American life.

The Federal Reserve's triennial Survey of Consumer Finances (SCF) provides the most comprehensive assessment of American family net worth.^1/ It asks a broad sample of American families about their assets, debts, and other financial matters. Recently, the Fed released data from the latest SCF, which was conducted in 2007. The Fed also released new tables comparing the 2007 data, on an inflation-adjusted (or real) basis, with the data from six previous SCFs going back to 1989. These data show that the real net worth of American families grew significantly in the years leading up to the current financial crisis. This was true for the typical family overall, and to a lesser but still significant degree for typical low-income, minority, and single-parent families.

We know, of course, that many of the gains have been erased by big declines in home equity, stock prices, and employment since the current financial crisis erupted in August 2007. It is too early to determine exactly how the declines have affected the financial standing of American families. However, the latest SCF findings, summarized below, are a useful tool for determining where families stood before the crisis hit.

A decade of growth, 1998–2007

On the whole, Americans' net worth has grown substantially over the last two decades. Median family net worth, or the level at which half of all families have more net worth and half have less, rose (in 2007 dollars) from $75,500 in 1989 to $91,300 in 1998, a 21 percent increase. It then rose to $120,200 in 2007, a 32 percent increase from 1998.

In the most recent decade covered by the SCF, median family assets rose 41 percent, from $156,900 in 1998 to $221,500 in 2007, while median family debt rose 63 percent, from $41,400 to $67,300. In other words, the rapid growth in assets from 1998 to 2007 was accompanied by an even faster growth in liabilities. But because median debt grew from a smaller base than median assets, and thus by a smaller dollar amount, median net worth increased.^2/

The increase in real median family asset holdings over this period was highly concentrated in nonfinancial assets, especially residential real estate. The percentage of families that owned nonfinancial assets edged up, from 90 in 1998 to 92 in 2007, and the real median amount of those assets rose 42 percent, to $177,400. Owner-occupied homes dominate family nonfinancial assets. From 1998 to 2007, the percentage of families owning a primary residence rose from 66 to 69, while the real median value of the residences they occupied rose from $127,300 to $200,000 (a 57 percent increase). Not surprisingly, home-secured debt (mostly mortgages and home equity loans on primary residences) also rose rapidly over this period. The percentage of households with such debt increased from 43 in 1998 to 49 in 2007, while the real median amount of these debts rose from $78,900 to $107,000 (a 36 percent increase).

Family net worth tends to increase as income earners approach the end of their working lives. Consequently, some of the increase in real net worth between 1998 and 2007 is simply due to the aging of the American population. However, the SCF data suggest gains even when controlling for age. All age brackets in the 2007 SCF showed gains in real net worth compared to the same age bracket nine years earlier, although the gains were minimal to modest for families headed by individuals who were younger than 45.

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Gains among families of modest means

The SCF shows that low-income, low-education, minority, and single-parent households, among other groups, tend to have below-average net worth. Although median net worth for these types of families remained or fell further below the overall median in 2007, their net worth nonetheless improved from 1998 to 2007—in part because, as explained below, they became increasingly likely to own important types of assets such as homes, retirement accounts, and cars.

Families with very low income. Generally, the tie between current income and net worth is strong because the less income a family has, the fewer assets it can buy. Very low-income families, defined here as those in the lowest 20 percent of the distribution of income reported in the SCF, had real net worth of only $7,400 in 1998, or about 8 percent of overall median family net worth that year. The net worth of very low-income families rose just under 10 percent over the next nine years, to $8,100, less than 7 percent of overall median family net worth in 2007.

In 2007 as compared to 1998, a greater percentage of very low-income families reported holding assets such as checking accounts, retirement accounts, houses, and cars. However, except for houses, the real median value of their holdings did not rise rapidly, and the lower rate of homeownership among very low-income families (41 percent in 2007, compared to 69 percent for all families) limited their real estate gains, too. Of course, this could also make them relatively less vulnerable to the declines in home values since 2007.

Families with low levels of education. According to the SCF, families headed by individuals with a high school education or less typically have lower net worth than families headed by individuals with a higher level of education. This remained true in 2007, despite gains in real median net worth among less educated families. For those with less than a high school education, real net worth rose 23 percent, from $26,900 in 1998 to $33,200 in 2007. An increase in the percentage of families owning checking accounts and cars helped boost the median assets of these families. Families with a high school education remained wealthier than those with less education, holding real median net worth of $80,300 in 2007. However, they experienced a smaller rate of increase from 1998 (17 percent) and saw their median net worth slip from 75 percent of the overall median in 1998 to 67 percent in 2007.

Racial and ethnic minority families. After doubling between 1989 and 1998, the real median net worth of nonwhite and Hispanic families rose about 31 percent from 1998 to 2007, from $21,200 to $27,800. This was slower than the 40 percent rise in the real median net worth of non-Hispanic white families, primarily due to a faster rate of increase in indebtedness for minority families.

Minority families' real asset holdings grew relatively rapidly from 1998 to 2007 in two senses. First, the percentage of minority families reporting asset holdings in the SCF rose from 90 to 95, whereas the percentage for non-Hispanic whites held steady at 99. The percentage of minority families with retirement accounts and cars rose especially rapidly, and their homeownership rate rose almost 5 percentage points, to 52 percent. Second, among families reporting assets, the real median value rose faster for minorities (up 55 percent to $89,200) than for non-Hispanic whites (up 46 percent to $271,000).

However, from 1998 to 2007, the indebtedness of minority families grew faster than their asset holdings and faster than the indebtedness of non-Hispanic whites. Seventy-eight percent of minority families were in debt in 2007 and the real median amount of their debts was $43,900. That amount is a 123 percent increase from 1998 levels, compared to a 51 percent rise to $76,400 for non-Hispanic whites.

Debts related to real estate and education contributed to the expansion of indebtedness among minority families. The real median amount of home-secured debt did not differ much by race/ethnicity in 1998 and was only slightly higher for minorities in 2007. However, the percentage of minority families with home-secured debt rose from 31 percent in 1998 to 40 percent in 2007, compared to an increase from 47 to 52 percent for non-Hispanic whites. In 1998, 11 percent of minority and non-Hispanic white families owed educational debts. By 2007, 18 percent of minority families had educational debts, versus 14 percent of non-Hispanic white families, and the median amount owed rose 48 percent among minorities (to $9,600) but only 32 percent among non-Hispanic whites (to $12,500). Thus, minority families disproportionately increased their indebtedness between 1998 and 2007 in large part to acquire real and educational assets, increasing their vulnerability to recent declines in housing prices and jobs.

Single-parent families. The real median net worth of single-parent families rose a moderate 14 percent from 1998 to 2007, from $36,000 to $41,000. Over this period, these families experienced significant gains in the median value of their assets. However, the gains in asset value were offset by increases in the percentage of single-parent families in debt and the real median amount of their debts. For example, the real median amount of mortgages and other home-secured debt held by single-parent families increased by 91 percent from 1998 to 2007. Increased use of installment and educational debt also curbed the net worth gains of single-parent families.

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Assessing the reversal

In summary, the SCF reveals that from 1998 to 2007, real net worth rose substantially for the typical American family. It also rose for typical families within less wealthy subgroups, although not as rapidly. In some cases, a lower rate of homeownership kept net worth gains lower for the less wealthy, and in some cases increased mortgage, educational, and other debt held their net worth gains down.

Many of the gains realized between 1998 and 2007 have been reversed by the subsequent financial crisis and recession. Economists with the Fed's Board of Governors estimate that the decline in housing and stock prices from the time of the 2007 SCF through October 2008 reduced overall median family net worth by 17.8 percent from its 2007 high point of $120,200. That would leave real median family net worth at around $99,000, which is less than the median family net worth of $101,200 recorded by the SCF in 2001. If we also allow for declines in homeownership through foreclosure, declines in employment due to the recession, and further drops in housing prices since October 2008, real median family net worth could be slipping toward the 1998 level of $91,300.

At this point, we simply have little information on exactly how post-2007 losses have been distributed across different categories of families. For many less affluent families, lower exposure to real estate and stock ownership may dampen the impact of the asset price declines since 2007, just as it reduced the benefits they received when asset prices were rising. However, a precise assessment of the impact and distribution of net worth changes since 2007 will have to await better data, including those from the 2010 SCF.

1/ The SCF provides the best available data on the assets American families already own, but it excludes sources of income to which family members may be entitled in the future, such as Social Security or pension payments. To learn how including these types of family resources can affect calculations of wealth, see the article "A New Look at the Wealth Adequacy of Older U.S. Households," by David A. Love, Paul A. Smith, and Lucy C. McNair, in the December 2008 edition of Review of Income and Wealth. Available at www3.interscience.wiley.com/journal/118503348/home.

2/ It is inherent in the way medians are defined that (the change in) median net worth is generally not exactly equal to (the change in) median assets minus (the change in) median debts. If we used mean (or arithmetic average) net worth instead, these relationships would hold exactly. However, mean net worth is heavily influenced by the holdings of very affluent households, making it less suited for highlighting trends in the financial condition of families of modest means.