Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consum

[MichaelB]

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

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).

 

[ziggy29]

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.

 

[Meadbh]

Wow........those are startling numbers!
Thank you for posting.

 

[samclem]

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:

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.

I'll await the jubilant press stories celebrating the decrease in "income disparity" in the US.

 

[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)

 

[MichaelB]

I'll await the jubilant press stories celebrating the decrease in "income disparity" in the US.

Do not hold your breath.

 

[samclem]

(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)

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.

 

[Richard4444]

Agreed

 

[FIREd]

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)

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.

 

[rescueme]

There is no doubt in my mind that a home should be included in one's net worth.

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.

 

[donheff]

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)

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.

 

[eridanus]

Most people think their belongings are worth more than they're actually worth. This applies to cars and houses and MacBooks.

 

[Katsmeow]

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).

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.

 

[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).

 

[samclem]

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).

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.

 

[JakeBrake]

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.

 

[scrabbler1]

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.

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.

 

[meierlde]

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.

 

[Cato]

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.

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.

 

[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).

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.

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.

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.

 

[traineeinvestor]

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.

+1

That said, although home equity is not part of my retirement plan (other assets will meet my cash flow needs), one of the back up plans is to downsize or take out a reverse mortgage (should they ever become available here) - at the end of the day the value of most homes will fund a good few years of living expenses if when the impact of rent is taken into account.

 

[kombat]

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)

Right. But of course, we do consider the "opportunity cost" of the lost earning potential of an at-home parent.

Why wouldn't you?

That's probably the single most expensive element of having a child for a formerly-dual-income household.

 

[W2R]

+1

That said, although home equity is not part of my retirement plan (other assets will meet my cash flow needs), one of the back up plans is to downsize or take out a reverse mortgage (should they ever become available here) - at the end of the day the value of most homes will fund a good few years of living expenses if when the impact of rent is taken into account.

So far I haven't considered my house as a back up plan because after the hurricane here, I have come to regard houses as a little more ephemeral than previously and maybe not reliable enough for a Plan B for me (YMMV).

Presently I am thinking on and off about buying a more expensive home, but if I do then it seems unrealistic for me to regard it as anything more than just a consumer purchase, like a car. Pretty big consumer venture, though, and that is one reason I haven't really gotten going on the househunting process.

Well, that plus the fact that I really love my present home despite its most definite flaws. Looking online, I haven't found one that inspires me to move, at any price. But if I do find such a house, will I look into it? I don't know. To me, a home is just a place to live and the purchase price is money out the window.

 

[rescueme]

To me, a home is just a place to live and the purchase price is money out the window.

+1

It's like buying anything else. If it has some value after "you are done with it"? Great.

Sure, we have a home but we don't look at it as anything else than a place to live, at this time in our lives.

But a primary home as an "investment" or having any alternate value to support our "lifestyle"? I don't think so.

Even if we follow through with our tentative plans to move, it will just be a transfer of asset from one home to another - nothing more.

 

[Katsmeow]

+1

It's like buying anything else. If it has some value after "you are done with it"? Great.

Sure, we have a home but we don't look at it as anything else than a place to live, at this time in our lives.

But a primary home as an "investment" or having any alternate value to support our "lifestyle"? I don't think so.

Yes....but....

Take the person who has $1,000,000 and owns a home worth $250,000 with no mortgage.

Take the person who has $1,000,000 and owns a home worth $250,000 with a mortgage of $200,000.

Take the person who has $1,000,000 and rents.

The first person has more money available for non-housing costs than the others. Person 1 if retired can either withdraw less money from the portfolio or can withdraw the same amount as Person 2 or 3 but can take the money that Person 2 or 3 would spend on housing and spend on other things.

So to assert that the fact that Person 1 has a paid for house shouldn't be considered as an asset is basically ignoring that fact. In reality the person who has the paid for house does have more assets and is better off than the person with the same amount of money who doesn't have a paid for house.

We can debate whether someone with $1,000,000 and a $250,000 paid for house is better off than a person with $1,200,000 and a $250,000 house with a $200,000 mortgage but that isn't the situation I'm addressing.