On Monday, the Federal Reserve released its triennial Survey of Consumer Finances. Started in 1989, the SCF provides the best available data on the financial conditions of U.S. households and cross-sectional differences in income, asset holdings, and liabilities. Although information on the aggregate market value of stocks, real estate, and other assets is routinely made available through public and private sources, the SCF is unique in that it breaks down the portfolio of the typical household by income, race, age, and household status and allows researchers to measure the dispersion in wealth across the population based on these variables.
The release of this year’s SCF (for surveys completed in 2010) received more media attention than is typical because of its disastrous finding: median household net worth plummeted by 38.8% between 2007 and 2010 and is now down to levels not seen since 1992. The White House quickly responded to the news, claiming that “the entire drop in household wealth… occurred in 2008 – before the President took office.” The White House went on to claim that “household wealth has risen every year President Obama has been in office” and then cited increases in stock aggregates as evidence that things have, in fact, improved.
The claims made by the White House are disingenuous (at best) because they ignore the median U.S. household and focus instead on the increase in overall wealth, which has largely come from gains in the stock market. The White House is essentially saying that we shouldn’t worry about the plight of the typical family because Warren Buffett’s stock holdings have gone up in value by tens of billions of dollars since March 2009. The focus on aggregate household net worth is extremely comical when compared to previous statements made by the President and others in his Administration about the country’s lamentable concentration of wealth and income in the hands of a “fortunate few.” Someone should ask President Obama if this means we needn’t worry about income disparities anymore because total household income is up nearly 20% on an inflation-adjusted basis over the past 10 years?
The basic issue is that the portfolio of the median household differs substantially from a pro rata slice of total U.S. household wealth. Among households in the 40th to 60th income percentile, the primary residence accounted for 48.3% of all assets. For households in the top 10%, the primary residence accounted for just 19.8% of all assets. Between 2007 and 2010, the median value of the primary residence owned by households fell by 19%, from $209,500 to just $170,000. Worse, the median net worth of households that owned homes fell by 30%, from $246,000 to $174,500. The math is simple: the typical household was more dependent on house values as a share of their total wealth and house prices dropped by more than any other asset class, causing the typical household to be disproportionately impacted by the fall in house prices.
While other asset prices have indeed recovered since the President took office, house prices have not. Based on the Case-Shiller 20-city index, house prices are down 5.3% since President Obama took office. Interestingly, the President signed into law a housing tax credit in 2009 that temporarily boosted transactions and prices, which likely caused the 2010 survey to overstate the heath of the median household’s balance sheet relative to today. Once the tax credit expired, house prices renewed their descent, causing those who purchased a house for more than $150,000 to lose out as the credit amount of $8,000 was less than the savings generated by simply delaying the purchase a few months. Overall, wealth in owner-occupied housing is down between $314 billion and $1.1 trillion since President Obama took office (depending how one allocates the losses in the first quarter of 2009).
Figure 1: Case-Shiller 20 City House Price Index
As the White House explains in its response to the study, stock market wealth is up sharply since 2009. But of what value is this to the median household? According to the SCF, in 2010 53% of households in the 40th to 60th percentile owned a retirement account and 12% owned stocks directly. By comparison, more than 90% of households in the top 10% had a retirement account and nearly 50% owned stocks directly. More telling is the size of the holdings. Among those that held the asset, the median household in the top 10% had retirement accounts worth $277,000 and stock holdings worth $60,000, while those in the 40th to 60th percentile had just $22,800 and $5,600, respectively. Between inauguration and December 31, 2010, the stock market was up 47%. Just as lower income households bore the brunt of the decline in housing values, those with higher incomes benefitted disproportionately from the rebound in stock prices. Assuming no added contributions over the period, the median of the top 10% saw its combined stock and retirement holdings grow from $229,252 to $337,000 (+$107,000) even as the median household’s gains totaled $9,080 ($28,400 relative to $19,319).
The increase in stock prices benefitted all Americans, as increased equity values lead to more business investment, more hiring, and increased consumption spending. But this White House has in no way attempted to deepen our appreciation for shared prosperity. Given the President’s focus on income disparities, it is beyond cyclical to use stock price gains of the “top 1%” to camouflage the pain the typical household is feeling in this economy.
Could President Obama have arrested the house price decline that wiped out so much of the typical household’s net worth during his tenure? It would have been expensive and likely required loan workouts that expedited the loan resolution process and helped the market find a bottom more rapidly. Instead, the President attempted to temporarily stabilize prices at an artificially high level through the tax credit and then prosecute mortgage servicers. It is hard to conceive of two policies that, in conjunction, could have done more to delay the housing recovery and potential rebound in the median household’s net worth. The Obama Administration’s attempt to use rising stock values to paper over these policy missteps is not likely to have much resonance among those actually living through this economy.