Housing Bust Cost Average American Family 40 Percent of Their Net Worth, Says the Fed

The release last week of the Federal Reserve’s much-anticipated three-year study of America’s finances, its Survey of Consumer Finances, confirmed what many families already know: Between 2007 and 2010 the average family’s net worth declined by nearly 40 percent, mostly because of the decline in housing prices. The Fed study also confirmed that their incomes also fell significantly in real terms, by nearly eight percent.

It was during this period that the country’s Gross Domestic Product (GDP) dropped by more than five percent between the third quarter of 2007 and the second quarter of 2009 while unemployment jumped from 5 percent to 9.5 percent. But the seeds of the decline in net worth had been sown decades earlier as politicians, aided by the media, successfully persuaded Americans that home ownership was to be desired greatly.

By reducing interest rates, giving tax breaks on the deductibility of interest paid on home mortgages, and encouraging (some would say forcing) banks to reduce lending standards, the stage was set for the housing bubble. That bubble burst in late 2007 and the decline in housing prices that continues to the present day has had its impact on America’s families.

Following the end of the Second World War, there were many reasons that housing prices should have gone higher: the return of soldiers wanting to start families, the pent-up demand for consumer goods, the beginning of the baby boom, and the long decline in long-term interest rates. And yet, according to economist Robert Shiller, real home prices increased by only about one percent a year, after inflation. But home prices exploded starting in the late 1990s, averaging four percent a year, thanks to politicians’ determination that everyone should own a home, and the Federal Reserve’s willingness to keep interest rates abnormally low to encourage the necessary borrowing.

Since most of the wealth of America’s middle class is in real estate, the impact of the implosion of housing prices on its balance sheet isn’t surprising. According to the Fed study, the median home equity plummeted from $110,000 in 2007 to $75,000 in 2010. And this study is based on data that is nearly two years old, so the continuing decline in housing prices isn’t reflected.