Where middle-class America’s wealth is tied up
The housing crash hurt the poor and middle class more than the rich, who rode the bull stock market.
The financial crisis and the Great Recession were absolutely devastating for the wealth of middle- and lower-income Americans. A report from the Federal Reserve Bank of Minneapolis shows just how big of a hit they took:
The average household in the top 10% of today’s wealth distribution is almost three times as rich as the average household in the top 10% of 1971’s distribution. Meanwhile, the average household in the bottom half is slightly poorer.
This is a striking demonstration of rising inequality, but it also tells a story about the last few decades of American economic life. Beginning in the late 1990s, the upper half of the wealth distribution started to pull away from the lower half, but on the eve of the housing crash, all three categories had seen a steady gain in wealth since 1950. A person living in July 2006, looking back on the past half-century, could feel reasonably comfortable that most Americans were still living the dream of steadily rising wealth.
But the housing price decline that began in mid-2006, and the chain of disasters that followed, totally wiped out that trend. Eight years later, the picture looks like one of divergence rather than broadly shared gains.
Why? One reason is that the middle- and lower-income Americans tend to hold much of their wealth in houses, while the upper class tends to own a lot of stocks. The Minneapolis Fed’s report is based on a recent paper by economists Moritz Kuhn, Moritz Schularick and Ulrike Steins, which measures historical U.S. wealth levels using the Survey of Consumer Finances. The authors carefully adjust their data for aging (older people tend to have accumulated more wealth) and shrinking household size, and find that the overall trends remain solidly in place.
Kuhn et al. find big differences between the various groups pictured above. Families in both the bottom 50% and the middle 40% tend to have most of their money in houses (usually their own). The main difference between the two groups is debt – the bottom 50% relatively have a lot more of it, which cancels out their housing assets and leaves them with very little net worth. The top 10%, in contrast, have the bulk of their money in the stock market.
That breakdown agrees with what other economists have reported:
The housing crash, financial crisis and Great Recession was concentrated in the housing sector. In real terms, house prices fell about 50% from peak to trough, and still haven’t recovered: