Fed: Americans' wealth dropped 40 percent | Hacker News Reader

Fed: Americans' wealth dropped 40 percent

washingtonpost.com

60 pointsadventureful64 comments

The report they are attempting to summarize covers the period from 2007 to 2010. It was just released by the Fed yesterday. It's publicly available, so I'm puzzled as to why they didn't link directly to the source material from the article.

Here it is anyway: http://www.federalreserve.gov/pubs/bulletin/2012/PDF/scf12.p...

This seems hugely misleading as an economic barometer. Isn't it the case that real estate wealth was surging absurdly [in 2007], obscuring a rise in debt? If debt growth has leveled off, it seems like the story is Americans getting their shit together and stopping their debt accumulation, not "losing" bubble wealth. No?

//edit: 2010?? Did they forget to hit 'publish' when this was still timely?

2010?? Did they forget to hit 'publish' when this was still timely?

These statistics take time to collect and process. For example, it takes 3 quarters for the BEA to finalize their GDP estimate for a given quarter, and that number continues to revise every summer for the following 3-5 years or so. Can't remember the exact timeline, but these numbers take time.

I was going to say the same thing, basically that article notes that house prices have tumbled 40% and that is the biggest asset most people have, and if you're leveraged (which is to say you have a mortgage) then the contribution of your house toward your net worth probably went away, and so now you are 'less wealthy'.

That reasoning completely sidesteps the fact that houses should not have ever risen to the prices they did. The sudden 'house wealth' bubble was directly attributed to extremely bad fiscal policy pretty much throughout the ranks. And while a number of us in Silicon Valley have already learned the lesson 'your not really rich if your wealth is all in a bubble asset' the rest of the country got to learn this too. It sucks, but its more like "you know what your house will be worth in another 15 to 20 years when it would have gotten there based on a reasonable fiscal policy and a 2% economic growth rate.

(and yes it appears to be a story from 2 yrs ago, just when the real estate market crash was in everyone's mind, although this reporter seems to have picked it up today for a few hits during an election year.)

> It sucks, but its more like "you know what your house will be worth in another 15 to 20 years when it would have gotten there based on a reasonable fiscal policy and a 2% economic growth rate.

Any reason for using 2% growth instead of something closer to the US average (which is around 4%)?

http://visualizingeconomics.com/2010/11/04/log-scale-long-te...

When I'm doing armchair economic analysis I use the 2% growth rate as its one that pretty much everyone agrees is the 'floor' of all estimates. So if you read my comment and did the math, and 15 to 20 years from now looked at your house value, you may find I exactly called it, but you may find that it was a bit under as the economy grew better than that. The chance that you would see lower than 2% growth is small (but non-zero!). There was a time (pre-2000 btw) when I would use the more optimistic numbers when planning ahead :-)

If I remember my macro-economics course 2% (or was it 3%) is a natural growth rate for a mature economy. We of course never see this rate since we always go for booms until we bust.

3% may appear low but it means that your economy will double in ~23 years, or about one generation.

Here is someone else claiming that 2% is the average:

http://seekingalpha.com/article/224600-2-real-per-capita-gdp...

[NB I have no idea which one is correct!]

Edit: The two studies have quite different starting dates - one is at the start of the 19th century and the other at the end.

At least credit card debt has fallen across the board.

"The survey also confirmed that Americans are shifting the kinds of debts that they carry. The share of families with credit card debt declined by 6.7 percentage points to 39.4 percent, and the median balance of that debt fell 16.1 percent to $2,600."

http://finance.yahoo.com/news/family-net-worth-drops-level-1...

This has recently shifted to student loan debt however. The effects of this type of debt are a lot subtler and nastier because you can't get student loan debt discharged in bankruptcy proceedings.

http://www.washingtonpost.com/blogs/college-inc/post/student...

What I found interesting was that about a quarter of Americans never had credit cards -- 23% as of 2007.

I'd love to see deeper stats on who does/doesn't carry a revolving credit account. I've become increasingly convinced they're among the most dangerous financial instruments you can present someone with. Others (housing, student debt) are at least backed by assets and/or earning power, however much they may be subject to bubble inflation.

How the hell is the median wealth of Americans 77k?! Does this not factor in debt?

I'm sure it does. But most debt is taken in order to acquire an asset. If you take out a loan for $20,000 to buy a car and $300,000 to buy a house, you've got $320,000 in debt, but you've also got assets in the same amount, meaning that your net worth is unchanged. Fluctuations in the market value of your assets can still drive your net worth down (or up), of course.

not if the house is overpriced - how do you otherwise explain that your net wealth has fallen 40%, when in reality it hasn't changed at all?!? (you still own the same house!)

This would be covered under the "market fluctuations" I mentioned. You may own the same house, but it's only worth what someone else will pay for it. If the market value of your house drops 40%, then your net worth will take a proportional hit.

If you look at other values (total assets in US, household net worth, etc) then a median wealth of $77k is in line with all of the other measures.

It is not difficult to accumulate a net worth of $77k in the US. You can do it on a pretty mediocre income with a modicum of discipline. My net worth continuously increased (very modestly) even when I was poor.

Net-worth =Assets-Liabilities

The Fed tags American wealth at around $58 trillion total, last I recall. I suspect the median is a bizarre way to calculate American wealth.

That includes equities, real estate, precious metals, homes, bonds, etc.

The stock market rebounding back upward nearly 100% added trillions to that no doubt.

I would think it'd be far better to take the middle 80% of Americans and find an average wealth value (lop off the top 10% and bottom 10%). That would give you a perspective on how most of the nation is doing, especially since the very top radically skews the data upward.

http://en.wikipedia.org/wiki/Wealth_in_the_United_States

Interesting data point on the top 1% wealth wise:

"They [the 1%] controlled nearly a third of the nation’s financial assets (investment holdings) and about 28 percent of nonfinancial assets (the value of property, cars, jewelry, etc.). These measures will be particularly interesting to revisit when the new, post-recession data arrives."

"The Times had estimated the threshold for being in the top 1 percent in household income at about $380,000, 7.5 times median household income, using census data from 2008 through 2010. But for net worth, the 1 percent threshold for net worth in the Fed data was nearly $8.4 million, or 69 times the median household’s net holdings of $121,000."

http://economix.blogs.nytimes.com/2012/01/17/measuring-the-t...

>I would think it'd be far better to take the middle 80% of Americans and find an average wealth value (lop off the top 10% and bottom 10%). That would give you a perspective on how most of the nation is doing, especially since the very top radically skews the data upward.

How does the enormous wealth of the top 1% skew the median wealth upwards or downwards? I think you might be confusing median with average.

The 1% has a very limited ability to drive change in the median wealth. The average wealth is very likely much much higher (probably closer to a half million) than the median, signaling vast income inequality.

The median is a much more useful statistic when dealing with this kind of distribution, as it applies to a much larger population than the average, which is useless for ~80% of the population as an indicator.

I'll be even more bold and declare that the top 1% has no more ability to effect the median than any other 1% of the population.

Using the median isn't strange at all for this kind of calculation.

I would suggest that the median is taken, in this case, because it provides the biggest and sexiest headline number.

The average (and by extension the total) wealth has gone down by a much smaller percentage since 2007. The fluctuations just happened to have hit the people around the middle particularly hard. The people at the bottom haven't seen their net wealth decline at all, because they never had any. The people at the top have seen their net wealth decline substantially, but since it was largely in other asset classes less so [percentage-wise] than the people right in the middle, whose net wealth was dominated by home equity.

Bottom line: recessions suck. They happen every decade or so. Plan with this in mind.

It's worse than strange, I don't think it works at all.

Wealth increases from the bottom 1% to the top 1% at an ever accelerating clip. If you take the median, you have absolutely no clue what the health of the groups above or below look like.

For example: if the median wealth is $77,000 --- you can't use that to then calculate how much actual wealth is in the middle 80% of the country (not even close in fact), because that $77k figure is radically off base for the massive skew that the top 10% in that 80% group is going to contain. But you have no means to derive how much wealth you're talking about being contained by that 10% group in the top of the 80% bracket (no means to figure out the skew at the top or bottom).

If you had 1 million data points, and your median is $77k, what does that tell you about the total wealth in the 1 million? It tells you almost nothing. What's the increasing skew like for the top 10,000 in that million? Because that probably contains 30% of all the wealth in the million set.

That's the point of removing the top 10% and bottom 10% from the equation. Which I noted in the comment you replied to. The top 10% radically skews the picture.

Calculating wealth by a median, in a nation of 300 million people, only barely kinda-sorta works if you have a very large number of data points, otherwise you get a completely useless data point. Also, medians don't work very well due to population bunches when it comes to wealth, it's not smooth. So if your middle numerical just misses a wealth spike a few points up above the median how useful is your information? If it just misses a big wealth plunge a few points down, what does it tell you about the health of the people in the bottom 40%?

A/K/A a "trimmed mean".

Why would it not be? Sounds about right. Even post-bubble, the median house is still worth a couple of hundred grand, and people do pay off their mortgages eventually.

The scary part is how little other wealth people have socked away for their retirement. I was brought up to believe that you'll need at least a few million dollars in investments (in today's money) in order to retire comfortably, so you damn well better start socking that away as early as possible.

...wealth we never really possessed.

I don't know how much economic sense that statement makes exactly; it's a little simplistic. Consider:

Some people bought new homes for the first time at the top of the bubble, trading real dollars and real future liabilities for a house. The fact that the house can no longer be sold for nearly as much materially impacts what they will be able to do with their future: they have lost wealth.

And at any time, many individuals could have sold their home to another person, in exchange for real tangible wealth which could have been put in a lasting form. That's an opportunity cost and represents a tangible loss as well. It's true that not every individual could have done this, though, yes.

It's a complicated picture, really, and we oughtn't simplify it too far in either direction.

they haven't really lost anything - they still own the same house, and no money, just as before(at the height at the bubble)

A house that was purchased with $250k of debt, that is now only worth $150k, has cost the buyer $100k, for nothing. That is $100k of lost wealth to the buyer. The buyer purchased $250k worth of house, using future earnings, and now only owns $150k worth of house (but still owes $250k of future earnings). That is a devastating economic blow to a middle class family, and to dismiss it as "they haven't really lost anything" is simplistic and cruel.

They haven't lost anything, in the sense that savings appreciating slower than inflation is not losing anything, although few would suggest that this is not "losing" something.

What has been lost is choice and opportunity for an easily identified class people (homeowners in areas that could not sustain the demand for homes) on a relatively large scale. I, on the other hand, a renter who has most of his wealth in securities am not so much impacted: I only lost some liquidity in the few years it took for the stock market to bounce back.

In modern economics, there isn't really any distinction between "real" and "nominal" wealth. Value is value, measured by current market prices.

There are heterodox economic systems that do make a distinction; for example, Marxian economics distinguishes between "exchange value" (current market price) and other kinds of value, such as "use value" (e.g. the usefulness of your copper pan for cooking does not decrease even if the price of copper crashes). But those aren't too popular among modern economists.

If you have all your wealth in cash and there's inflation...did you ever really possess it?

I just watched a documenry tonight that partially explains this: contains fairly obvious stuff that intellectually we know is true, but, the last 15 minutes suggest a few things that sheepal (that is, ordinary sheep/people) can do to improve our situation like not buying from misbehaving corporations. Yeah, maybe. One thing that is really interesting in the first part of the movie is how psychology was used to control consumers. Buy, baby buy, because it will make you FEEL better! Another main message of the movie, that war = profit for corporations is obvious, but worth thinking about. They also cover the fact that the corporate controlled news media is not to be trusted.

So, really obvious stuff, but well presented.

http://www.ethosthemovie.com/

This movie is on Netflix under documentaries.

Wealth: I'm not sure that word means what you think it means.

http://drduru.com/onetwentytwo/wp-content/uploads/2011/02/11...

That's a pretty misleading headline. "Americans' wealth" /= "wealth of the median American".

As others have noted, it was wealth Americans never really possessed. The data point that I'd find most interesting is how much debt was accumulated on the back of that phony wealth. That is, how much more debt were Americans able to accrue specifically because of the bubble (than they otherwise would have been able to).

Losing bubble wealth is bad enough (the psychological impact alone), losing it when you've stacked debt against it is a very real problem. The fake wealth was used to create very real debt. Suddenly you've got 1/3 of all home owners under water on their mortgages.

"As others have noted, it was wealth Americans never really possessed."

If a person sold a house bought pre-bubble during the bubble, the wealth was very muched possessed. If a person invested money in real estate during the bubble, they very much lost wealth. Likewise, if their 401k took a hit when the stock market dove, or they cashed out their retirement savings when they lost their job, the wealth lost wasn't on paper, but very much real.

Yes, some people's gains and losses were on paper, but for others, the losses were jobs, homes, and savings.

As every banker knows, debt is an asset.

The bubble said everyones houses were worth 20 gazillion dollars. One person is persuaded to sell thier house for 10 million dollars, another borrows 10 m to buy it.

The seller is very happy, The borrower is obligied to repay and the bank borrowed 8 m in someone elses cash and invented theremaining 2.

Is there an economist who could tell me what that 2 m that gets created by bank lending actually does to inflation ?

Debt is only an asset to the bank.

Where do you get this concept of the bank inventing 2 million? Shirly that's just wrong.

http://en.m.wikipedia.org/wiki/Money_creation

the figures I quoted are just examples, but money creation trhu bank lending is real, and I just wonder if derivatives / banking crisis is enabling less or more of it outside the traditional measures.

It was a thought without much supportive thinking

But debt is an asset to everyone but the debtor.

Real wealth can be realized through a sale of the asset (or in the case of cash, judged based on the real goods it can buy). If something can never actually be sold for whatever the supposed price is, then the value isn't real. The vast majority of the bubble premium could have never been realized under any scenario, and thus was not real (there wasn't even a fraction enough cash, bonds, equities, etc. to put toward realizing the real estate bubble's premium, the market could have never become actual through real sales). Only a fraction of US homes were sold during the bubble era.

You can technically bid a stock to trillions in dollar worth (say Cisco goes to $25 trillion during the dotcom bubble), but you'll never be able to actually realize even a fraction of that value. And if you can't mathematically ever realize that value through a sale, then it is not actual.

You're talking about something between fire sale price and liquidation value; this far under-states value from an economic perspective. It is the equivalent of saying AAPL isn't worth $571 because if literally every holder of Apple stock decided to sell today they wouldn't get that price. It remains plausible that an astute family selling their house in 2006 or 2007 would have captured most if not all of the premium in their home's value to today's prices.

>As others have noted, it was wealth Americans never really possessed

This is one thing that definitely rings true to me. I grew up in a wealthy community that abutted many, many poorer ones. I would often ride my bike through all of these places, especially the most impoverished ones and lament to myself "So this is the richest country in the world?"

Later, after I graduated college and started looking for places to live it was amazing to me how much wealth was caught up in places I don't think I'd ever want to live. Nearly identical tract housing for 10s of miles in all directions. Nothing walkable at all, even sidewalks were just an afterthought. "So, is this is what wealth looks like?" I thought to myself. Obviously it wasn't wealth. That money never existed, but the debt people signed contracts for is real.

My mom used to push my dad to buy a 2nd house in Florida. They wanted to retire there and the prices were rising so fast she believed they never would be able to afford it if they didn't get one in 2005 or 2006. (They are retiring in the next 2013-2014 range).

My dad always refused. He ran a medium sized manufacturing business (about 100 employees) and is certainly in the top 5%, but not the 1% of people in the country in terms of income.

His rational at the time for not buying the house was very simple: "There aren't that many people in this country that can afford a house this expensive. It just doesn't add up to me. I know that most people don't make what I make, and if it's a struggle for me to do it rationally, something is wrong here".

They didn't buy the house, but we all thought he was being too pride bound at the time.

Now they're looking at what used to be 1.5 million dollar places that are going for $550-$600k. Meanwhile our house in New Jersey dropped in price roughly $100k because the bubble economics didn't take hold here as much.

The bubble was absolutely crazy. At the end of the day there were a lot of people buying houses that they could only afford assuming the value of the house increased signifcantly before they sold them. Essentially they could only pay the carrying costs - and that was before the jobs market tanked.

> rings true to me

The problem with complex macroeconomics and popular politics summarized in one phrase.

I wonder if we are best served by a democracy when, with perhaps the most important political issue there is, common sense and anecdotes provide little value and a higher education in a particular field is required to make an informed decision.

Well, that was the reason for the creation of the Fed in the first place, the idea that you could have technocrats setting macroeconomics policy without political influence. But then Allan Greenspan happened, an ideologue disciple of Ayn Rand. When the federal budget was running a surplus in 2000 he told congress that budget surpluses were dangerous, then he pushed for Bush's tax cuts and then he helped inflate real estate and ignored everybody that was saying it was an out of control bubble.

So no, unelected elites aren't going to save us either.

The Fed was founded because in fly-over country the financial system was rickety. Off the coasts, banks were regularly going bust and taking people's savings with them. This almost always happened during harvest season when demand for currency was high. In the urban centers the banking system was working fine. The problem to solve was a ridiculously inefficient and inept banking sector in large swathes of the country.

As soon as the idea of some sort of federal level reform got going the House Of Morgan and friends seized control and the Fed became a tool of the major banks, which were already working fine, to increase their profits and control. Almost from the start it was the case the Federal Reserve Bank of New York really ran the system, which was entirely not the original idea. The idea of the Fed originated from a temporary problem unique to a particular period of American history, but was immediately usurped by clever power and money hungry people.

That was, in an antiquated sense, the premise behind the US being born a republic. Not macroeconomics in particular, but insofar as it is a compromise between technocracy and majority rule and self determination. Philosophers and political theorist have been struggling with this since before Plato's Republic.

Its a very very real question, though the consensus that democracy is the best thing we've got has been building for centuries.

For calling the last three recessions surveys did better than economists' forecasts. You see similar results for forecasting and reporting current price inflation. I don't really buy that the common American man is an idiot.

"Elites" have pushed most idiotic economic and foreign policy initiatives against the popular will. Americans have generally had to be tricked by lies and expensive PR campaigns into supporting wars, for example. Their initial judgments were sound.

This is an interesting topic but I'm not sure it has much to do with the fluctuations of nominal wealth. The trouble isn't people realizing that they're less wealthy in a philosophical sense, it's that they're realizing they're less wealthy in the ordinary dollar sense.

The two factors aren't actually linked. My father got his original training as a city planner before going into IT, and NIMBY, combined with the desire for high property values, is the single most powerful political force in America. We simply don't have urban planning as it is practiced in most other countries, nor the land-value tax used in many places to drive urbanization.

Though you may be interested in reading the essay, "The Problem of Scarcity".

When you hear economists advocate monetary stimulus, this is part of the reason why. Being over your head in interest not only sucks, it has real consequences for economic supply and demand. This is true both for consumers and "job creators".

When people think they have more money, they spend more money.

https://en.wikipedia.org/wiki/Wealth_effect

This isn't so bad for the underwater homeowner. He or she can strategically default and the bank will likely choose not to foreclose so that it can continue to claim that the mortgage is worth its full value.

That isn't how it's working out for thousands (maybe millions) of homeowners who've defaulted, either strategically or because they lost their job and simply can't afford to keep paying for a mortgage on a house worth tens or hundreds of thousands less than they paid for it. Banks are foreclosing at an unprecedented rate, and even sometimes doing so on homes of people who haven't actually missed a payment.

My parents neighborhood is now about 20% uninhabited, because of bank foreclosures. My parents are $70k+ in the hole on their house, purchased during the peak of the boom, and it would never cross their minds to default on a debt. $70k is a pretty devastating economic hit to a middle class couple, now living on savings and Social Security.

It's easy for folks not impacted by the economic meltdown (like those of us in the tech industry) to make light of the very real pain a lot of lower income and middle class home owners are going through right now. But, the reality is that people are being screwed left and right by the very banks that caused the crisis.

We need a google map which people can submit addresses to that have been foreclosed on. This will show the foreclosure rate in a way I would trust more than what the banks may be reporting.

Not specifically what you're wishing for, but interesting data porn, nonetheless: http://www.npr.org/templates/story/story.php?storyId=1114945...

How does one get foreclosed on while keeping their mortgage, insurance, and taxes current?

It is easier than you think. Sometimes you don't even need to have a mortgage.

http://www.bloomberg.com/news/2010-10-08/man-who-had-no-mort...

http://www.tampabay.com/news/business/realestate/bank-of-ame...

In some cases, the bank simply refuses to accept payment, forces the process, and fails to respond in any way to the mortgageholder: http://www.huffingtonpost.com/2012/05/17/norman-rousseau-for...

Mistakes, fraud, malice, incompetence, etc.

http://articles.sun-sentinel.com/2010-09-23/business/fl-wron...

http://online.wsj.com/article/SB1000142405297020379190457660...

http://www.huffingtonpost.com/2012/02/16/illegal-foreclosure...

http://www.huffingtonpost.com/2010/12/08/foreclosure-mistake...

http://abcnews.go.com/WN/robo-signers-blamed-foreclosure-mis...

http://seattletimes.nwsource.com/html/realestate/2015541624_...

This isn't isolated, it is a systemic problem in the banking industry right now, created by reckless (and illegal) business practices on the part of the major banks and mortgage companies.

There are certainly very strategic ways to deal with it, but you're going to take a large hit on credit with any default. That can be a very expensive price to pay over time.

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