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Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consum
06-12-2012, 07:33 AM
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#1
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Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consum
This is a Fed study, here. Lots of data and comparisons of income and wealth from 2007 to 2010. This is wonk candy. The highlights
Quote:
The Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2010 provides insights into changes in family income and net worth since the 2007 survey.1 The survey shows that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7 percent; median income had also fallen slightly in the preceding three-year period (figure 1). The decline in median income was widespread across demographic groups, with only a few groups experiencing stable or rising incomes.Most noticeably, median incomes moved higher for retirees and other nonworking families. The decline in median income was most pronounced among more highly educated families, families headed by persons aged less than 55, and families living in the South andWest regions. Real mean income fell even more than median income in the recent period, by 11.1 percent across all families. The decline in mean income was even more widespread than the decline in median income, with virtually all demographic groups experiencing a decline between 2007 and 2010; the decline in the mean was most pronounced in the top 10 percent of the income distribution and for higher education or wealth groups. Over the preceding three years, mean income had risen, especially for high-net-worth families and families headed by a person who was self-employed.
The decreases in family income over the 2007−10 period were substantially smaller than the declines in both median and mean net worth; overall, median net worth fell 38.8 percent, and the mean fell 14.7 percent (figure 2).Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. The exceptions to this pattern in the medians and means are seen in the highest 10 percent of the distributions of income and net worth, where changes in the median were relatively muted. Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices. This collapse is reflected in the patterns of change in net worth across demographic groups to varying degrees, depending on the rate of homeownership and the proportion of assets invested in housing. The decline in median net worth was especially large for families in groups where housing was a larger share of assets, such as families headed by someone 35 to 44 years old (median net worth fell 54.4 percent) and families in the West region (median net worth fell 55.3 percent).
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06-12-2012, 08:07 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
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A few interesting notes:
* Median income was down for w*rking people but not those who didn't w*rk. Makes sense, since depressed wages were a large part of the decline. In an economy where employers can freely lord it over their "subjects" it's easier for them to put the hammer down and say "take it or leave it".
* The wealthiest households had among the largest drops in median income but a low drop in median in net worth. This suggests to me that the wealthier households weren't drawing down investments at low rates, or perhaps that they had a much smaller percentage of their net worth in housing. I suspect they may also have added to net worth by hoarding cash during this time.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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06-12-2012, 08:12 AM
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#3
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Wow........those are startling numbers!
Thank you for posting.
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06-12-2012, 08:52 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Thanks for posting. Yes, it's gloomy news, yet not too surprising based on what we've been through. When unemployment is this high, we should expect wages to take a beating. Supply/demand and all that stuff.
House prices: Well, though we know our homes are an asset many of us don't count our home's value in figuring our "net worth for purposes of withdrawal rate." Good news! The crashing home prices didn't even budge the needle for us!
And, there's this:
Quote:
The decline in mean income was even more widespread than the decline in median income, with virtually all demographic groups experiencing a decline between 2007 and 2010; the decline in the mean was most pronounced in the top 10 percent of the income distribution and for higher education or wealth groups.
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I'll await the jubilant press stories celebrating the decrease in "income disparity" in the US.
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06-12-2012, 09:02 AM
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#5
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Full time employment: Posting here.
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overall, median net worth fell 38.8 percent
I read an article online somewhere attributing a huge amount of that drop in net worth to the real estate drop in worth. Which is also against the usual theory that when figuring your net worth, to leave out your home value. (I never did quite understand why that it is - it seems to me that if you have a $250,000 home with no mortgage, you have a $250,000 higher net worth than if you had a $250,000 mortgage)
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06-12-2012, 09:04 AM
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#6
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Administrator
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Quote:
Originally Posted by samclem
I'll await the jubilant press stories celebrating the decrease in "income disparity" in the US.
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Do not hold your breath.
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06-12-2012, 09:10 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Richard4444
(I never did quite understand why that it is - it seems to me that if you have a $250,000 home with no mortgage, you have a $250,000 higher net worth than if you had a $250,000 mortgage)
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There's no doubt that it increases your net worth, but the real question is "what are you hoping to find out by computing your net worth?" Many of us find it's best to leave homes out of computations of net worth when figuring a suitable withdrawal rate from our portfolios, since it's hard to access that "worth". If you sell the house, you still have to live somewhere.
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06-12-2012, 09:41 AM
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#8
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Full time employment: Posting here.
Join Date: Jul 2011
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Agreed
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06-12-2012, 09:42 AM
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#9
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Moderator Emeritus
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Posts: 12,894
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Quote:
Originally Posted by Richard4444
overall, median net worth fell 38.8 percent
I read an article online somewhere attributing a huge amount of that drop in net worth to the real estate drop in worth. Which is also against the usual theory that when figuring your net worth, to leave out your home value. (I never did quite understand why that it is - it seems to me that if you have a $250,000 home with no mortgage, you have a $250,000 higher net worth than if you had a $250,000 mortgage)
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There is no doubt in my mind that a home should be included in one's net worth.
Until last week, I lived in my paid for house. I just turned my house into an investment by renting it out (and I have myself become a renter). Did I get any richer all of a sudden? My investments have gone up in value (since the house is now an investment), and my passive income has gone up for sure (since I now collect rents), but so have my expenses (since I now have to pay rent). The transaction has had no significant impact on my FIRE plans.
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06-12-2012, 09:57 AM
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#10
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gone traveling
Join Date: Apr 2009
Location: Eastern PA
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Quote:
Originally Posted by FIREd
There is no doubt in my mind that a home should be included in one's net worth.
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Absoutely.
Our home (and personal holdings) are included in an annual statement that we submit to our (elder law) attorney, who is responsible for disposition of personal/real holdings upon our joint passing. The "value" will be added to the SNT trust for the ongoing expenses for our disabled (adult) "child" to meet his future needs, until his end of days.
We don't include our current home in our retirement assets for planning purposes. Heck, you have to live somewhere and we don't consider it as an asset to be "cashed in" to provide retirement income, be it to downsize or have a reverse mortgage.
If we follow through with our tentative plans to sell and move to Maui (much planning involved, and in progress) we still have RE, but again it has nothing to do with our current retirement income planning. BTW, we're both retired.
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06-12-2012, 10:13 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Richard4444
overall, median net worth fell 38.8 percent
I read an article online somewhere attributing a huge amount of that drop in net worth to the real estate drop in worth. Which is also against the usual theory that when figuring your net worth, to leave out your home value. (I never did quite understand why that it is - it seems to me that if you have a $250,000 home with no mortgage, you have a $250,000 higher net worth than if you had a $250,000 mortgage)
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I don't think the "usual theory" is that you don't include home value in net worth, just the opposite: net worth = assets - liabilities (and home equity is an asset). But the conventional approach on this board is to ignore home value since it isn't normally used to generate an income stream (I agree with that assessment). But, for that reason, a lot of people hereabouts conflate portfolio value and net worth which flies in the face of the actual definition of net worth in my opinion.
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Idleness is fatal only to the mediocre -- Albert Camus
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06-12-2012, 11:56 AM
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#12
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Thinks s/he gets paid by the post
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Most people think their belongings are worth more than they're actually worth. This applies to cars and houses and MacBooks.
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06-12-2012, 01:00 PM
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#13
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Quote:
Originally Posted by donheff
But the conventional approach on this board is to ignore home value since it isn't normally used to generate an income stream (I agree with that assessment).
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I really have problems with that because when you look at finances you have to look at income and expenses.
Imagine Person 1 with, say, $1,000,000 in assets but doesn't own a home. That persons expenses per year include rent.
Person 2 with, say, $700,000 in assets owns a home worth $300,000 that is paid for. That persons expenses per year are less than Person's 1 and Person 2 pays no rent.
It seems to me that the paid for house worth $300,000 effectively does generate an income stream equal to what it would cost for living expenses if there was not a paid for home (ie either rent or mortgage costs).
I get why some people don't mind having a mortgage and that's fine. But, I've always had difficulty with the idea that a paid for house has no income value since the fact you don't have to pay rent or a mortgage means that you need less income for everything else.
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06-12-2012, 01:57 PM
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#14
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Recycles dryer sheets
Join Date: Aug 2010
Location: alberta
Posts: 51
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It is an eye opener to see how much higher the median networth is for families without children when compared to families with children - raising children seems even more expensive than I had believed.
2010 figures $205,700 vs $86,700 (median).
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06-12-2012, 02:09 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Cato
It is an eye opener to see how much higher the median networth is for families without children when compared to families with children - raising children seems even more expensive than I had believed.
2010 figures $205,700 vs $86,700 (median).
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Careful with the cause/effect analysis there.
1) Look at the earnings records: Childless couples earned more than couples with kids. That helps explain why their net worth is higher, and has nothing to do with the cost of raising kids (unless we're looking at opportunity cost. "Gee, I could have been at work late tonight slaving away at that Powerpoint presentation and looking good for the boss, instead I'm stuck here reading a bedtime story to my little girl.")
2) Once the kids are out of the house, is that a childless couple? If so, that would go a LONG way to explaining the disparity in net worth. Those folks are just older.
Raising a child does cost money, but we can't just compare net worth to figure out how much.
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06-12-2012, 02:33 PM
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#16
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The canned Quicken Net Worth statement has separate categories with subtotals for assets, liabilities, and investments. So, it's simple for a mathematically challenged person like me to figure sustained withdrawal rates on investments only.
I use "True Value" per the tax records as the value of our real property for the Net Worth statement. Traditionally, but not always, "True Value" is lower than Market Value.
Other than cash in the bank, real property is the only asset (not investment) we have that appears on the Net Worth statement.
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06-12-2012, 09:42 PM
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#17
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Quote:
Originally Posted by Katsmeow
I really have problems with that because when you look at finances you have to look at income and expenses.
Imagine Person 1 with, say, $1,000,000 in assets but doesn't own a home. That persons expenses per year include rent.
Person 2 with, say, $700,000 in assets owns a home worth $300,000 that is paid for. That persons expenses per year are less than Person's 1 and Person 2 pays no rent.
It seems to me that the paid for house worth $300,000 effectively does generate an income stream equal to what it would cost for living expenses if there was not a paid for home (ie either rent or mortgage costs).
I get why some people don't mind having a mortgage and that's fine. But, I've always had difficulty with the idea that a paid for house has no income value since the fact you don't have to pay rent or a mortgage means that you need less income for everything else.
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But remember that while Person 1 is paying rent, Person 2 is paying the expenses that rent pays for such as property taxes and home maintenance costs. I own my co-op apartment outright and have done so for the last 14 years but I still have to pay monthly maintenance charges which cover the financial and physical upkeep of the co-op. Those monthly charges are a subset of what I would be paying in rent.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.
"I want my money working for me instead of me working for my money!"
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06-12-2012, 09:55 PM
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#18
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Thinks s/he gets paid by the post
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The big difference in where the money goes is that in the case of owning a home free and clear the interest on the value of the house is never monetized (at least with current income tax laws, it used to be in the UK as I understand it). Otherwise you have to pay all the expenses a landlord has to pay, along with a few that a tennant has to pay such as renters insurance (thus a homeowners policy which covers contents, as well as perhaps a payment for additional living expenses. )
Does anyone have figures showing the costs of free and clear home ownership with renting.
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06-13-2012, 12:48 AM
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#19
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Recycles dryer sheets
Join Date: Aug 2010
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Quote:
Originally Posted by samclem
Careful with the cause/effect analysis there.
1) Look at the earnings records: Childless couples earned more than couples with kids. That helps explain why their net worth is higher, and has nothing to do with the cost of raising kids (unless we're looking at opportunity cost. "Gee, I could have been at work late tonight slaving away at that Powerpoint presentation and looking good for the boss, instead I'm stuck here reading a bedtime story to my little girl.")
2) Once the kids are out of the house, is that a childless couple? If so, that would go a LONG way to explaining the disparity in net worth. Those folks are just older.
Raising a child does cost money, but we can't just compare net worth to figure out how much.
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Good and valid points, but that doesn't entirely explain the difference between the childless couples and those with children. Looking at the mean net worth (which probably reflects the higher income earners) rather than the median, there is still a difference but it is not as pronounced.
We have 4 kids and I would not trade them for the world, but it has been expensive raising and preparing them for the new world and I can easily believe that one child = 1 house. Having said that, we have been fortunate to be able to afford to provide them with the means to jumpstart their own life without debt, and I would not have it any other way.
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06-13-2012, 04:56 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by donheff
I don't think the "usual theory" is that you don't include home value in net worth, just the opposite: net worth = assets - liabilities (and home equity is an asset). But the conventional approach on this board is to ignore home value since it isn't normally used to generate an income stream (I agree with that assessment).
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Quote:
Originally Posted by Katsmeow
I really have problems with that because when you look at finances you have to look at income and expenses.
Imagine Person 1 with, say, $1,000,000 in assets but doesn't own a home. That persons expenses per year include rent.
Person 2 with, say, $700,000 in assets owns a home worth $300,000 that is paid for. That persons expenses per year are less than Person's 1 and Person 2 pays no rent.
It seems to me that the paid for house worth $300,000 effectively does generate an income stream equal to what it would cost for living expenses if there was not a paid for home (ie either rent or mortgage costs).
I get why some people don't mind having a mortgage and that's fine. But, I've always had difficulty with the idea that a paid for house has no income value since the fact you don't have to pay rent or a mortgage means that you need less income for everything else.
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Quote:
Originally Posted by scrabbler1
But remember that while Person 1 is paying rent, Person 2 is paying the expenses that rent pays for such as property taxes and home maintenance costs. I own my co-op apartment outright and have done so for the last 14 years but I still have to pay monthly maintenance charges which cover the financial and physical upkeep of the co-op. Those monthly charges are a subset of what I would be paying in rent.
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I think we are all saying the same thing and agree with the majority of this board that what matters is expenses and the cash flow coming in. Thus we look at what the portfolio can safely generate to meet those expenses (whether they include rent, property tax, whatever). We don't include the equity in our homes in these calculations unless we intend to sell and then we figure in the net added expenses of renting. Regardless of all that, the financial definition of net work remains assets - liabilities and thus includes home equity.
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Idleness is fatal only to the mediocre -- Albert Camus
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