Falling Home Prices Are the Latest Blow to the Middle Class

Americans have seen their net worth fall for the first time since 2009, casting questions on whether the economy is as resilient as policymakers say. 

After hitting a record high in June, US household wealth declined to $81.3tn, a 0.2% drop, the Federal Reserve said on Thursday.

“Household net worth is now $15.4tn, or 23% higher than its peak in 2007, before the financial crisis, thanks mainly to the strong stock market rally in recent years,” wrote Ozlem Yaylaci, US economist for IHS Global Insight. 

Americans’ net worth is influenced by two major factors: homes, and stock market holdings like retirement funds. Rises in home prices help the middle class; jumps in stock prices help the rich.

In the third quarter of the year, Americans’ stock and mutual fund portfolios shrank $700bn, giving a hit to overall wealth. The value of their homes increased $245bn. 

Middle-class benefits pale beside those of the rich

Those gains have mostly benefited wealthier households, while leaving middle-class wealth largely unchanged.

That’s because houses accounts for nearly 63% of the assets of the middle-class, Edward Wolff, an economics professor at New York University, said in a paper released on Monday. That compares to just 9% for the wealthiest 1%.

Middle-class households, specifically, are now less likely to own homes. The US homeownership rate dropped from 73% in 2007 to 62%, where it has remained in 2012 and 2013according to Gallup.

Meanwhile, most stock market wealth is held by the top 10% of households, which own 80% of stocks. 

Only 9.5% of middle-class families assets are in stocks.

In fact, a US family is more likely to own a cat than individual stocks, according to CNN Money. While many families don’t own any stock directly, many of them have invested indirectly through their pension funds and 401(k) plans. Yet even that number is in decline, according to the Federal Reserve. In 2013, direct and indirect stock ownership dropped to 48.8%. It was 53.2% in 2007.

Only about 13.8% of US families hold individual stocks as of 2013, compared to 18% in 2007 and 21% in 2001. 

As a result, middle-income households rely much more than wealthier households on the value of their homes. Rising home prices can make people feel more financially secure and more willing to spend. This “wealth effect” could boost growth.

The Federal Reserve data of record-high net worth clashes with other evidence that Americans have less money than they used to. The median household’s net worth was just $63,800 in 2013, down from $64,600 in 2010, says Wolff.

There was another huge drop in household wealth between 2007 and 2010, when median net worth plummeted 44% from $115,100.

The decline in net worth is directly related to the drop in US household incomes. Median household income slipped from $49,000 in 2010 to $46,700 three years later, according to Fed data. 

Typical American households are currently earning as much as they were in 1995when the median household income was $51,719.

Household debt increases, but people will still spend.

Retirement savings have suffered, too. The percentage who owned defined-contribution retirement accounts, such as 401(k)s and IRAs, fell from 53% in 2007 before the recession, to 44% in 2013. The dollar value of middle-class accounts dropped 16% during that period.

Household debt also increased during the quarter, mostly from forms of debt not related to mortgages. That could include student loans, credit cards and auto loans.

There is a bright spot in the Fed’s report, however: Despite the increase in household debt, there is evidence that American families are paying down more debt than ever. US households’ debt-to-income ratio – which compares debt to how much families are earning – fell to 96.8%, the lowest ratio since 2002. In the past few years American households owed far more than they were earning. 

The dip in net worth is not likely to influence consumer spending, said IHS Global Insight’s US economist, Yaylaci. As unemployment rate improves and stock prices continues to ride, he expects the household worth to improve. 

“We believe the decline in household net worth will reverse itself in the fourth quarter: in-line with rising stock prices and improving labor market conditions,” Yaylaci wrote.

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