Mortgage (Photo credit: 401(K) 2012)
Sometimes it’s good to be a loser. Losing weight is considered positive. Losing all of your debt is never a bad idea. Can we all agree that involuntarily losing your wealth is a bad thing?
The wake of the Great Recession washed away a great deal of family wealth. According to the St. Louis Fed, over $17 trillion in household net worth vanished at the height of the last economic downturn. Average household equity dropped by 25 percent and stock investments by more than 50 percent. Most families lost wealth, but some were hit harder than others.
Young Families Lost the Most
Young families hold the title for biggest losers of wealth. The St. Louis Fed showed that the average household under the age of 40 lost 43.8 percent of its wealth. This statistic makes a lot of sense. Most Americans hold wealth in the form of equity. Young families bought new homes at the peak of the housing bubble. Since young families don’t have much else in terms of wealth, they were highly susceptible to the market crash.
More Minority Families Lost Wealth
As per usual, traditionally disadvantaged minorities also made the list of top three biggest losers. If you were African-American or Hispanic, your median decrease in family net worth was 37. Comparatively, white families lost roughly 11 percent.
Non-College Grads Lost to College Grads
College graduates held on to nearly twice as much wealth than non-college grads. The Fed found that families without a college educated parent lost a median 22 percent of wealth. College graduates, on the other hand, lost a mere 15 percent.
It’s common for college graduates to outperform non-graduates in matters of personal finance. Economists believe that the added education translates into smarter money decisions. Who knew education could make you smarter?
Old, White, College Graduates Lose the Least
So, if young, minority, non-college graduates lost the most wealth, who do you think lost the least? Why old, white, college graduates of course. Between these three demographics, the greatest loss of wealth came with having a college degree (15 percent). Those 55 and older lost a median of 11 percent and those of white complexion saw a reduction of 11 percent.
Home Equity Isn’t a Safe Investment
The big problem with groups who lost the most wealth is over-dependence. Each of the three biggest losers saw large decreases in wealth because most of their net worth was held in home equity. Although historically home equity has been a great source of wealth for these groups, the recent housing bubble has challenged this tradition. In the most recent recession, total losses in equity trumped the losses suffered by the stock market. Home equity isn’t the safe wealth creator that it has been for past generations.
How did your wealth increase/decrease during the last recession? Did your home equity increase or decrease your wealth over the last four years? Do you identify with any of the findings from the Fed study?
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Those numbers are scary! Losing over 40% of your wealth? I don’t think I lost anything, because I didn’t cash anything. I kept my house, my stocks and will try to hold onto them until it gets better. I would probably lose money by selling now. And make a lot by buying (like the saying “when other cry you should buy”), if I had some cash!
It’s pretty sad. I know several young families who are underwater in their mortgage and owe more than they home is worth. Young families definitely suffered the most from the inflated housing market.
It always seems like downturns in the economy cause the most pain to those who have the least.. With the wealth divide in this country at an all-time high, no doubt that problem is only multiplying..
Your last point is very key, John… Our homes should not be considered “our biggest investments” anymore.. They can lose a huge chunk of their value in just a few months as the housing market turns. At this point, I am just hoping that it reclaims some of what it had previously..
Yikes! I hope so. I was fortunate to live in an area that went untouched by the housing boom. My house has appreciated over the last few years. I can’t imagine having to overcome a giant deficit. See Negative Net Worth Run?
We were renting prior to 2008 and bought shortly thereafter. Considering that was the case, our net worth has increased substantially since then. We do not really view our house as an investment though and focus more-so on saving for retirement via other means (Roth, 401k, etc).
I bought in 2007, but lived in one of the few areas that actually saw increase in home prices. My equity is part of my retirement plans, but I’m definitely trying to grow my income and investment more than my home value.
Some rich folks argue that home equity is not wealth, nor is it an investment (Rich Dad Poor Dad). Statistics are scary nevertheless, although I’m happy to say I had no wealth to begin with to gain or lose.
You might appreciate my US News and World Report Article that is publishing on Tuesday “Why Home Equity isn’t Worth Buying a House.” However, I’ve found the Rich Dad, Poor Dad folks often overlook the power homeownership has on managing housing inflation; aka: you dodge rent inflation while benefiting from home price inflation. What asset can you buy these day’s that fixes a portion of your necessary monthly spending?
Hear hear!
Great article, John… You guys are pretty lucky to have yours go up.
Right now, we’re hearing over here in China that many people have made home ownership their chief investment tool, mostly because of their lack of faith in Chinese banks. We are in a relatively affordable city, and $250,000 seems to be the norm for a smallish apartment. And that number keeps going up, up, up… From what we’re hearing, there may be a real estate bubble burst over here that rivals the one in the U.S. I have no idea how that would affect the world economy, but I imagine it wouldn’t be good.
My dad – who is an old, white, college grad – obviously lost more dollar-wise than my husband and I did, but percentage wise, it was far less. The equity we lost in our home alone was about a 20-25% drop.
I bought in late 2008 and have only seen an increase. I would be terrified if I had bought at the height and had lost 30% or more in house value.
It really goes to show how variable our nest eggs really are. Most people with money in markets – or even real estate – simply have to be prepared to handle variability. It’s a hard mental adjustment to realize that money we “had” isn’t there anymore, so it’s best not to get too attached to it if it’s in asset classes that are volatile.
Even though many people thought they were diversified with real estate, this is where they held the majority of their net worth and when the housing bubble collapsed, so did their net worth.
Along the lines of net worth, I know the income gap is also getting further which is a bad trend IMO for the country as a whole. That is the top 1% of earnings are increasing their income a lot faster than the rest of people(that’s a fact, not opinion)
That’s the problem with having so much of the “wealth” equation tied up in unrealized gains and equity. The change can come unexpectedly and swiftly wiping out almost everything for some people. Kind of like all of these “dream teams” in sports–they look great on paper with all of their accomplishments and previous stats, but the real world application of their skills and cohesion doesn’t always translate. It’s not my thing, but I wonder how the conservative folks compare (the ones that only buy CD’s and keep multiple maxed cash accounts) to those who rely on paper-profits and wealth measurements.
Wow. I believe it. Many young investors are pretty careless with their investments: they don’t protect dollars invested in the markets. Plus, their minds are on other things: families, job, etc. I would imagine that older college graduates “won” because they had more access to good investment resources and paid attention to them.
My wealthy actually increased. I am a young guy, but a very well educated one who works hard. I don’t expect anyone else to give me money, I work hard for it.