10. Summary and concluding remarks
Median wealth showed robust growth during the 1980s and 1990s and an even faster advance from 2007 to 2010. Then the Great Recession hit. From 2007 to 2010, house prices fell by 24 percent in real terms, stock prices by 26 percent, and median wealth by a staggering 47 percent. Median income also dropped but by a relatively modest 6.4 percent. The percent of households with nonpositive net worth rose sharply from 18.6 to 22.5.
Wealth inequality after remaining relatively stable from 1989 to 2007 showed a steep increase over the Great Recession. The Gini coefficient climbed from 0.834 to 0.870 and the share of the top 20 percent from 85 to 89 percent. The share of the bottom 40 percent experienced a precipitous drop from 0.2 to -0.9 percent. In contrast, income inequality, after rising moderately from 2000 to 2007 (an increase of 0.12 Gini points), dropped substantially from 2006 to 2009 (a decrease of 0.25 Gini points).
The percentage increase in net worth (also income) from 1983 to 2010 was much greater for the top wealth (and income) groups than for those lower in the distribution. The greatest gains were enjoyed by the upper 20 percent, particularly the top one percent, of the respective distributions. Between 1983 and 2010, the top one percent received 38 percent of the total growth in net worth and 39 percent of the total increase in income. The figures for the top 20 percent are 101 percent and 104 percent, respectively – that is to say, the upper quintile got it all!.
The years 2001 to 2007 also saw a sharply rising debt to income ratio, reaching its highest level in almost 25 years, at 1.19 among all households in 2007. The debt-equity ratio was also way up, from 0.14 to 0.18. Most of the rising debt was from increased mortgages on homes. From 2007 to 2010 both ratios rose, the former moderately from 1.19 to 1.27 and the latter more steeply from 0.18 to 0.21. This was true despite a moderate retrenchment of overall average debt of 4.4 percent and reflected the drop in both mean wealth and income.
Home values as a share of total assets among all households remained relatively unchanged from 1983 to 2010 (around 30 percent). However, net home equity as a share of total assets fell from 0.24 in 1983 to 0.18 in 2010, reflecting rising mortgage debt on homeowner's property, which grew from 21 percent in 1983 to 35 percent in 2007 and then jumped to 41 percent in 2010. The large increase in the ratio from 2007 to 2010 was a result of falling home values (average mortgage debt actually declined by 5.0 percent in absolute terms).
Trends are more pronounced for the middle class. Among the middle three wealth quintiles, there was a huge increase in the debt-income ratio from 1.00 in 2001 to 1.57 in 2007 and an almost doubling of the debt-equity ratio from 0.32 to 0.61 percent. The debt-equity ratio was also much higher among the middle 60 percent of households in 2007, at 0.61, than among the top one percent (0.028) or the next 19 percent (0.121). However, from 2007 to 2010, while the debt-equity ratio continued to advance to 0.72, the debt to income ratio actually fell off to 1.35. The reason is the substantial retrenchment of average debt among the middle class over these years. Overall debt fell by 25 percent in real terms, mortgage debt by 23 percent, and other debt by 32 percent. The fact that the debt-equity ratio rose over these years was a reflection of the steep drop in median net worth.
Despite the 24 percent plunge in house prices (in real terms) from 2007 to 2010, the share of home owners who were underwater was “only” 8.2 percent in 2010. However, average home equity among home owners did decline by 26 percent. This reduction would have been higher except for the contraction of mortgage debt noted above. Hispanics, younger households, and middle income households were hit particularly hard in terms of the loss of home equity.
One piece of mainly positive news is that among all households there was no deterioration in pension accumulations in DC-type pension plans over the Great Recession. The share of households with a DC account, after rising from 11 percent in 1983 to 53 percent in 2007, did fall off a bit to 50 percent in 2010. However, average DC pension wealth continued to grow from 2007 to 2010. The main reason was a shifting of household portfolios. Pension accounts as a share of total assets, after rising from 1.5 percent in 1983 to 12 percent in 2007, jumped to 15 percent in 2010. However, among middle class families, the share with a DC plan, after growing robustly from 12 percent in 1983 to 53 percent in 2007, fell off sharply to 46 percent in 2010, and the change in dollar terms from 2007 to 2010 was -24 percent. Thus, in terms of retirement preparedness from DC accounts, there was generally an improvement from 2007 to 2010 except for middle class households.
The key to understanding the plight of the middle class over the Great Recession was their high degree of leverage and the high concentration of assets in their home. The steep decline in median net worth between 2007 and 2010 was primarily due to the very high negative annual rate of return on net worth of the middle three wealth quintiles (-8.9 percent). This, in turn, was attributable to the precipitous fall in home prices and their very high degree of leverage. High leverage, moreover, helps explain why median wealth fell more than house (and stock) prices over these years and declined much more than median household income.
The large spread in rates of return on net worth between the middle three wealth quintiles and the top quintile (over a point and a half lower) also largely explained why wealth inequality increased steeply from 2007 to 2010 despite the decline in income inequality. Indeed, the middle class took a bigger relative hit on their net worth from the decline in home prices than the top 20 percent did from the stock market plunge. This factor is also reflected in the fact that median wealth dropped much more in percentage terms than mean wealth over the Great Recession. The evidence, moreover, suggests that middle class households went into debt partly in order to increase their leverage and to raise their rate of return, at least when asset prices were rising. Of course, the increased leverage also made them very vulnerable when asset prices collapsed.
The racial disparity in wealth holdings, after fluctuating over the years from 1983 to 2007, was almost exactly the same in 2007 as in 1983. However, the Great Recession hit black households much harder than whites and the ratio of mean wealth between the two groups plunged from 0.19 in 2007 to 0.14 in 2010, mainly due to a 34 percent decline (in real terms) in African-American wealth. The relative (and absolute) losses suffered by black households from 2007 to 2010 are ascribable to the fact that blacks had a higher share of homes in their portfolio than did whites and much higher debt-equity ratios (0.55 and 0.15, respectively).
Hispanic households made sizeable gains on (non-Hispanic) white households from 1983 to 2007. The ratio of mean net worth grew from 0.16 to 0.26, the homeownership rate among Hispanic households climbed from 33 to 49 percent, and the ratio of homeownership rates with white households advanced from 48 percent in 1983 to 66 percent in 2007. However, in a reversal of fortunes, Hispanic households got hammered by the Great Recession. Their mean net worth plunged in half, the ratio of mean net worth with white households fell from 0.26 to 0.15, their home ownership rate fell by 1.9 percentage points, and their net home equity plummeted by 48 percent. The relative (and absolute) losses suffered by Hispanic households over these three years are also mainly due to the much larger share of homes in their wealth portfolio and their much higher debt-equity ratio (0.51 versus 0.15). Another likely factor is that a high percentage of Hispanics bought their homes close to the housing cycle peak.
Young households also got pummeled by the Great Recession. The ratio of net worth between households under age 35 and all households fell from 0.21 in 1983 to 0.17 in 2007 and then plunged to 0.10 in 2010. In (real) dollar terms, their mean net worth declined by 49 percent from 2007 to 2010. Among age group 35-44, the ratio of their net worth to the overall figure fell from 0.71 in 1983 to 0.58 in 2007 and then declined precipitously to 0.41 in 2010. In dollar terms, their wealth fell by 42 percent over the latter three years. The same two factors explain the losses suffered by young households – the higher share of homes in their wealth portfolio and their much higher leverage ratios.