Historic Asset Boom Passes by Half of Families

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.

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.

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
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How the Other Half Lives
The 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

Assets

Liabilities

Net worth

Net debt

RECESSION22.533.544.555.566.5$7 trillion20042006200820102012201420162018
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.

Netanyahu Rivals Team Up Against the Prime Minister for Israel’s Elections

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.

Fed Says Student Debt Is Hurting U.S. Housing Market

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.

A ‘Forgotten History’ Of How The U.S. Government Segregated America

Today African-American incomes on average are about 60 percent of average white incomes. But African-American wealth is about 5 percent of white wealth. Most middle-class families in this country gain their wealth from the equity they have in their homes. So this enormous difference between a 60 percent income ratio and a 5 percent wealth ratio is almost entirely attributable to federal housing policy implemented through the 20th century.

.. (16 min)

Why Housing Is Unaffordable in California

in California’s coastal metros more than two-thirds of cities and counties have policies explicitly aimed at restricting housing growth, such as limits on density. 

.. When a developer wants to break ground, local governments impose multilayered reviews that can mean getting approval from the municipal building department, health department, fire department and planning commission as well as elected officials.

Neighbors can delay or block projects using the state’s 1970 Environmental Quality Act. It isn’t coincidental that California’s housing prices soared during the 1970s. Getting a building permit in San Francisco takes about three times as long as in the typical American metro.

.. All told, it costs between $50,000 and $75,000 more to build a home in California than in the rest of the country. Building a low-income housing unit costs $332,000—about $80,000 more than the median home in Dallas or Phoenix.

.. Opponents accuse developers of being greedy, but their real gripe is that subdividing the lots would increase the housing stock and thereby diminish the value of their own homes.

.. California’s housing policies are intrinsically regressive. Limiting the supply drives up home values in well-to-do coastal communities, while pricing everyone else out of the market. Households in the lowest quartile in California spend about two-thirds of their incomes on housing; those in the top quartile spend just 16%.

.. The conundrum California’s landed gentry face is they want to boost their home values—and at the same time to have an abundant supply of low-wage workers to mow their lawns and clean their pools too.

Why Can’t We Get Cities Right?

Harvey will leave a huge amount of wreckage behind, some of it invisible. In particular, we don’t yet know just how much poison has been released by flooding of chemical plants, waste dumps, and more. But it’s a good bet that more people will eventually die from the toxins Harvey leaves behind than were killed during the storm itself.

.. Many toxic waste sites are flooded, but the Environmental Protection Agency is conspicuously absent.

.. Greater Houston still has less than a third as many people as greater New York, but it covers roughly the same area, and probably has a smaller percentage of land that hasn’t been paved or built on.

..  The median monthly rent on a one-bedroom apartment in San Francisco is more than $3,000, the highest in the nation and roughly triple the rent in Houston; the median price of a single-family home is more than $800,000.

.. America’s big metropolitan areas are pretty sharply divided between Sunbelt cities where anything goes, like Houston or Atlanta, and those on the East or West Coast where nothing goes, like San Francisco or, to a lesser extent, New York

.. Chicago is a huge city with dense development but relatively low housing prices; maybe it has some lessons to teach the rest of us?

.. this is one policy area where “both sides get it wrong” — a claim I usually despise

.. In particular, we should encourage construction that takes advantage of the most effective mass transit technology yet devised: the elevator.