Scant wealth leaves families vulnerable if recession hits, economists say
The decadelong economic expansion has showered the U.S. with staggering new wealth driven by a booming stock market and rising house prices.
But that windfall has passed by many Americans. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003, according to recent Federal Reserve figures. The top 1% of households have more than twice as much as they did in 2003.
This points to a potentially worrisome side of the expansion, now the longest on record. If another recession comes, it could be devastating for people who have only just recovered from the last one.
Wealth Rebound
Wealth, also called net worth, is the value of assets such as houses, savings and stocks minus debt such as mortgages and credit-card balances. Net worth is different from income, the cash a household receives each month such as wages, dividends and government benefits. It is common for countries to have a highly skewed wealth distribution. Nonetheless, in the U.S., wealth inequality has grown faster than income inequality in the past decade, making the current wealth gap the widest in the postwar period, according to a study by Moritz Kuhn, Moritz Schularick and Ulrike Steins, economists at the University of Bonn.
Behind this trend: More than 85% of the assets of the wealthiest 1% are in financial assets such as stocks, bonds or stakes in private companies. By contrast, slightly more than half of all assets owned by the bottom 50% of households comes from real estate, such as the family home. Economic and regulatory trends over the past decade have not only favored stock over housing wealth, but have also made it harder for the less affluent to even buy a home.
Rough Start
Since 2009, home prices have outpaced incomes, making it harder for families to purchase their first home.
Home prices have increased 41% since 2009
40
%
30
20
Percentage change in price of a starter home
10
Income has grown 8%
0
Percentage change in median income
-10
-20
2009
’10
’11
’12
’13
’14
’15
’16
’17
Note: Adjusted for inflation
Sources: CoreLogic (home prices); Commerce Department (incomes)
Until the mid-2000s, the net worth of households across the wealth distribution increased at roughly the same pace, keeping inequality stable. That started to change when housing prices took off in the early 2000s. For the bottom 50%, rising home values were more than offset by mortgage debt, which almost doubled between 2003 and 2007. For the top 1%, debt was flat between those years. When the housing bubble burst, many less-affluent households saw housing wealth wiped out; some lost their homes altogether.
Today, the bottom half of American households aren’t carrying so much debt compared with the prerecession peak, after adjusting for inflation. And starting in 2012, a recovery in home prices has allowed their net worth to inch up. But house prices, adjusted for inflation, have yet to reach their 2006 peak, according to the S&P CoreLogic Case-Shiller index. Meanwhile, a decade of rising equity prices has buoyed the 1% wealthiest households, pushing the value of their financial assets up 72% since the recession, after adjusting for inflation.
Paying the Mortgage
The bottom 50% of households saw a much bigger rise in mortgage debt during the housing boom than wealthier households
Aggregate mortgage debt, in trillions ($)
0
Top 1%
Next 9%
Bottom 50%
-1.5
-3.0
-4.5
-6.0
2005
’10
’15
2005
’10
’15
2005
’10
’15
Note: Figures shown in 2019 dollars
Source: Federal Reserve
Structural economic forces have affected the wealth of the rich and the lower-middle class differently. The Fed kept interest rates near zero and bought bonds in the years after the crisis to revive the economy, in the process amplifying the run-up in asset prices. “Who owns that stuff? Rich people,” said Karen Petrou, managing partner at Federal Financial Analytics.
Meanwhile, the share of families in the bottom half who own a home has fallen to about 37% in 2016, the latest year for which data are available, from 43% in 2007, according to the Fed. Homeownership among the entire population has crept up since 2016.
Homes in Las Vegas. More than half of all assets owned by the bottom 50% of households comes from real estate, such as the family home.PHOTO: ROGER KISBY FOR THE WALL STREET JOURNAL
For those who lost a house during the recession or never had one, getting a toehold in homeownership has become more difficult. Partly because of regulations designed to prevent another crisis, banks have toughened credit standards and down-payment requirements, said Susan Wachter, a University of Pennsylvania economist. Had the looser, prerecession credit standards stayed, the proportion of Americans who own their home would have been 5.2 percentage points higher in 2010-2013, a study by Ms. Wachter and three co-authors estimates.
Why the Economic Expansion Missed Many Americans
00:00 / 11:39
How the Other Half Lives
The net worth of the bottom half of American households has been slow to come back from the recession.
Note: Figures shown in 2019 dollars
Source: Federal Reserve
Danny Dougherty/THE WALL STREET JOURNAL
When the housing bubble burst, asset values plummeted, while debt fell much more slowly.
In 2010, the bottom 50% of American households had more debts than assets.
Wealth grew as the recession ended, as assets outpaced debt.
In recent years, the growth in assets has outpaced debt, allowing net worth to recover.
Households with little wealth, however, are more exposed to the vagaries of the economy. Areas that saw a bigger drop in housing wealth after the recession also suffered a sharper decline in consumption, according to research by economists Atif Mian, Kamalesh Rao and Amir Sufi.
“If no shock is happening then everything is fine, but if a shock is happening you have a much more fragile economy,” said Mr. Kuhn.
How can lawmakers address the gap in household wealth, if at all? Join the conversation below.
Leticia Segura ’s house in the West Humboldt Park neighborhood of Chicago lost about half its value during the recession, she said. Today, it is worth about $250,000, still almost $30,000 short of its value in 2007, she said.
Ms. Segura and her husband, Jesus, almost lost the home to foreclosure during the crisis after Mr. Segura lost his job and the couple fell behind on mortgage payments. A government program helped the couple get current, but they remained underwater on their mortgage until just a few months ago, meaning they owed more than their home’s value.
Today, both have new jobs and Ms. Segura feels more comfortable financially. But the couple remains cautious. They have set aside some money to cover the mortgage for three or four months should disaster strike again. “After that we’d just have to pray,” she said.
Cities are the engines of U.S. economic growth, but housing costs put them out of reach for many Americans. One major reason is that cities severely limit new residential construction, especially apartment buildings. For example, San Francisco permits tall buildings only in its northeast corner and Bayview, which together comprise less than a sixth of the city. Housing laws that favor tenants also reduce the incentive for developers to supply new apartments, as Milton Friedman and George Stigler observed as far back as the 1940s. Recently New York state approved a permanent extension of rent control in nearly one million apartments, and Oregon has made it more difficult to evict nonpaying tenants.
The problem is that local voters have an interest in restricting the housing supply. Existing homeowners worry that new housing will lower the prices of their homes. Existing tenants want price controls to limit rents. While prospective residents want new housing in cities, they don’t get to vote in local elections.
Fortunately, there’s a solution to this impasse. New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.
The challenge is how to implement this compromise. Developers can’t pay existing homeowners directly for the right to build new homes—which homeowners would they pay, and how much? But cities could use property taxes to facilitate a side payment. They could charge new residential developments a higher property tax than existing residents, and earmark the additional revenue toward payment of existing residents’ property taxes.
If required, the city could even offer existing residents negative property-tax payments. This tax benefit would shift the political dynamic. Existing residents would support new housing supply because they would recoup in lower property taxes more than they lost from lower housing values. Even tenants would benefit as some of the lower taxes on existing owners would be passed on to renters.
Previous efforts to reduce property taxes for homeowners have made political opposition to new housing worse. In 1978 California’s Proposition 13 limited property taxes to 1% of the original purchase price plus appreciation, which is capped at 2% a year. Contrast that with Chicago, where property taxes are set at 2.1% of home values, which are assessed every three years. Suppose new housing supply were to lower home values in both places. In California this would have almost no effect on property-tax burdens. In Chicago, the assessed value of property would fall, lowering taxes. Relative to Chicago, California punishes existing homeowners for new construction.
Some might worry that raising property taxes on new construction would increase rents for the poor. But limits on housing construction already limit housing options for the poor, and high home prices raise their rents. My proposal would improve the distribution of wealth. According to Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, a small fraction of Americans, mostly concentrated in coastal cities, own a sizable fraction of all housing wealth. My proposal would relax restrictions on development, which would enable new middle-income residents to move to cities.
Politics is messy, as elected officials must balance the interests of competing groups. But policy reforms that increase the total welfare of a community should be possible if the gains can be distributed to potential losers. In housing policy, this can be done through the property-tax system. A straightforward reform could unleash development and expand opportunity in America’s cities.
Centrist candidates strike an alliance in a bid to unseat the prime minister
If elected, Benny Gantz, a retired Israeli army chief, and Yair Lapid, a former TV anchor turned parliamentarian, agreed to take turns at running the country, they said in a statement Thursday. Mr. Gantz would serve as prime minister for the first 2½ years, and Mr. Lapid would take over for the rest of the four-year term.
The agreement between the centrist politicians is a result of several weeks of discussions amid questions over whether the two men could put aside their personal ambitions to unite against Mr. Netanyahu.
It also comes at a vulnerable moment for Mr. Netanyahu, who is expected to be indicted on corruption charges later this month. He will have a chance to defend himself in a hearing before charges are formally filed, and he has vowed to stay in power and to fight them. He doesn’t have to resign unless convicted. Mr. Netanyahu has denied wrongdoing..
Opinion polls project a tight contest, but some indicate that Mr. Gantz’s Israel Resilience party and Mr. Lapid’s Yesh Atid party could together secure more seats in Israel’s parliament than Mr. Netanyahu’s Likud.
“The new ruling party will bring forth a cadre of security and social leaders to ensure Israel’s security and to reconnect its people and heal the divide within Israeli society,” the parties said in a statement.
The two parties also said they would add former Israeli army chief Gabi Ashkenazi to their slate. Mr. Ashkenazi is seen as an important player in attracting votes from the right, which will be important if Messrs. Gantz and Lapid are to unseat Mr. Netanyahu.
Both Mr. Gantz and Mr. Lapid are running as anti-Netanyahu candidates, while emphasizing a commitment to addressing social problems in Israel like education, housing, health care and traffic.
They have struck a more moderate tone than Mr. Netanyahu on handling relations with the Palestinians. Before the agreement, Mr. Lapid’s camp said it was unsure whether Mr. Gantz supported a two-state solution to the Israeli-Palestinian conflict, citing at least one in his party who has opposed it in the past.
Mr. Netanyahu’s Likud party said the election would be a choice of “either a left-wing government of Lapid-Gantz with preventative support from the Arab parties, or a right-wing government with Netanyahu at its helm.”
As an alliance became more likely, Mr. Netanyahu issued statements and videos painting Mr. Gantz and Mr. Lapid as weak and leftist, while describing himself and his party as strong and right.
.. Israeli politicians must submit their party lists to Israel’s Central Election Committee by Thursday. Those lists must disclose whether the politicians will run as one ticket.
.. “For the first time since 2009 we have a competitive race for the premiership,” said Yohanan Plesner, president of the Jerusalem-based Israel Democracy Institute. “The main question is whether this new list can lure or be attractive enough for some center right and soft right voters. This is probably the question that will determine the outcome of the election.”
Mr. Gantz entered politics late last year, brandishing his security credentials but saying little about his policy positions to try to lure a broad swath of the electorate. He has consistently polled second to Mr. Netanyahu and his Likud party.
Mr. Lapid’s party finished second in the 2013 elections, the first contest after it was created, but has slid in the polls ever since. Mr. Lapid served for a year as the finance minister in Mr. Netanyahu’s government.
Report finds student debt has prevented 400,000 young Americans from buying homes, may help explain urban-rural economic divide
Student debt has prevented hundreds of thousands of young Americans from buying a home in recent years and may help explain why many college graduates have moved out of rural areas, the Federal Reserve said Wednesday.
The drop in homeownership among young households and the growing economic divide between rural and urban areas are two big puzzles of the economy this century. The Fed now says student debt—which has more than doubled over the past decade to $1.5 trillion—is one factor helping explain the shifts.
The share of households headed by someone between ages 24 and 32 years old who owned a home declined 9 percentage points in the decade through 2014, falling to 36% from 45%, the Fed said. There were many factors, but roughly 2 percentage points—or 20%—of the decline was directly due to households owing student debt, the Fed found.
The report also found that people with student debt are far more likely to move out of rural areas than those without student debt. “Only 52 percent of rural student loan borrowers still live in rural areas” six years after their records appear in a database that tracks consumer credit reports, the Fed said.
Why the Economic Expansion Missed Many Americans00:00 / 11:39How the Other Half LivesThe net worth of the bottom half of American households has been slow to come back from the recession.Wealth for the bottom 50% of Americans