2010 RecentTrendsinHouseholdWealthin
- (Wolff, 2010) ⇒ Edward N Wolff. (2010). “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-class Squeeze-an Update to 2007." Levy Economics Institute Working Papers Series.
Subject Headings: Household Wealth; Income Inequality; US Gini Index, Middle-Class Squeeze.
Notes
- It suggests that the bottom 40% of the US population has only 0.3% of wealth while the top 20% possesses 84% (see Figure 2).
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Abstract
I find here that the early and mid-aughts (2001 to 2007) witnessed both exploding debt and a consequent “middle-class squeeze.” Median wealth grew briskly in the late 1990s. It grew even faster in the aughts, while the inequality of net worth was up slightly. Indebtedness, which fell substantially during the late 1990s, skyrocketed in the early and mid-aughts; among the middle class, the debt-to-income ratio reached its highest level in 24 years. The concentration of investment-type assets generally remained as high in 2007 as during the previous two decades. The racial and ethnic disparity in wealth holdings, after stabilizing throughout most of the 1990s, widened in the years between 1998 and 2001, but then narrowed during the early and mid- aughts. Wealth also shifted in relative terms, away from young households (particularly those under age 45) and toward those in the 55–74 age group. Projections to July 2009, made on the basis of changes in stock and housing prices, indicate that median wealth plunged by 36 percent and there was a fairly steep rise in wealth inequality, with the Gini coefficient advancing from 0.834 to 0.865.
1. INTRODUCTION
The 1990s witnessed some remarkable events. The stock market boomed. On the basis of the Standard & Poor (S&P) 500 index, stock prices surged 171 percent between 1989 and 2001. Stock ownership spread and by 2001 (as we shall see below) over half of U.S. households owned stock either directly or indirectly. Real wages, after stagnating for many years, finally grew in the late 1990s. According to BLS figures, real mean hourly earnings gained 8.3 percent between 1995 and 2001.
However, 2001 saw a recession (albeit a short one). Moreover, the stock market peaked in 2000 and dropped steeply from 2000 to 2003, but recovered in 2004, so that between 2001 and 2004 the S&P 500 was down by only 5.3 percent in nominal terms, but 12.0 percent in real terms. Real wages rose very slowly from 2001 to 2004, with the BLS real mean hourly earnings up by only 1.5 percent, and median household income dropped in real terms by 1.5 percent. On the other hand, housing prices rose steeply. The median sales price of existing one-family homes rose by 17.9 percent in real terms nationwide. The other big story was household debt, particularly that of the middle class, which skyrocketed during these years, as we shall see below.
From 2004 to 2007, the stock market rebounded. The S&P 500 rose 31 percent in nominal terms and 19 percent in real terms. Over the period from 2001 to 2007, the S&P 500 was up 24 percent in nominal terms and 6 percent in real terms. Real wages remained stagnant, with the BLS real mean hourly earnings rising by only 1.0 percent. Median household income in real terms showed some growth over this period, rising by 3.2 percent. From 2001 to 2007 it gained 1.6 percent. From 2004 to 2007 housing prices slowed, with the median sales price of existing one-family homes nationwide advancing only 1.7 percent over these years in real terms. Over the years 2001 to 2007 real housing prices gained 18.8 percent.
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C. The “Middle-Class Squeeze”
Nowhere is the middle-class squeeze more vividly demonstrated than in their rising debt. As noted above, the ratio of debt-to-net-worth of the middle three wealth quintiles rose from 37 percent in 1983 to 46 percent in 2001 and then jumped to 61 percent in 2007. Correspondingly, their debt-to-income rose from 67 percent in 1983 to 100 percent in 2001 and then zoomed up to 157 percent in 2007! This new debt took two major forms. First, because housing prices went up over these years, families were able to borrow against the now-enhanced value of their homes by refinancing their mortgages and by taking out home equity loans (lines of credit secured by their home). In fact, mortgage debt on owner-occupied housing (principal residence only) climbed from 29 percent in 1983 to 47 percent in 2007, and home equity as a share of total assets actually fell from 44 to 35 percent over these years. Second, because of their increased availability, families ran up huge debt on their credit cards.
Where did the borrowing go? Some have asserted that it went to invest in stocks. However, if this were the case, then stocks as a share of total assets would have increased over this period, which it did not (it fell from 13 to 7 percent between 2001 and 2007). Moreover, it did not go into other assets. In fact, the rise in housing prices almost fully explains the increase in the net worth of the middle class from 2001 to 2007. Of the $16,400 rise in median wealth, gains in housing prices alone accounted for $14,000 or 86 percent of the growth in wealth. Instead, middle-class households, experiencing stagnating incomes, expanded their debt almost exclusively in order to finance consumption expenditures.
The question remains whether the consumption financed by the new debt was simply normal consumption or was there a consumption binge (acceleration) during the 2000s emanating from the expanded debt? That is, did the enhanced debt simply sustain usual consumption or did it lead to an expansion of consumption?
References
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| Author | volume | Date Value | title | type | journal | titleUrl | doi | note | year | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2010 RecentTrendsinHouseholdWealthin | Edward N Wolff | 2010 |
[[title::Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-class Squeeze-an Update to 2007|]]