Why the Middle Class is Feeling Poor
According to a recent news article in CNN Money, the personal wealth for the median American household may have dropped by as much as 40%, between 2007 and 2010. It’s no wonder the middle class is feeling significantly poorer, because they are. Not only did housing drop, the stock market tanked at the same time. Combined with high unemployment and lower wages, this is a tough time for millions of Americans.
Where did all the Wealth Go?
Most of the wealth disappeared from homeowner’s equity. Not only did home prices drop, but a significant number of Americans refinanced out their home equity and spent it. Millions of others lost their homes to foreclosure, along with any equity that previously existed. Since home equity is often the largest store of wealth for middle class Americans, they were hit the hardest.
The stock market crash was devastating to employee’s retirement accounts. The panic during the crash caused millions of people to move their funds out of the stock market at the worst possible time. They inked a permanent loss, even though the stock market has largely recovered. Once again, this hit the middle class the hardest, because a high percentage of their wealth was stored in their retirement accounts.
Staggering Statistics
Although these statistics look bleak, this time-period represents the absolute worst case, from an over-inflated high, to a post-crash low. Housing prices have stabilized in most areas and the stock market has regained most of its losses.
2007-2010
- Median net worth declined nearly 40%
Source: Federal Reserve
2010
- Median household net worth declined 35%
- Median stock & mutual fund portfolios dropped 33%
- Median home equity value dropped 28%
Source: Census Bureau
How I Prospered
Although my home equity dropped by hundreds of thousands of dollars, it meant nothing to me. My house was way over-valued in 2007 and now it is closer to reality. I plan to pay off my home and retire in it, so I don’t have to worry about the value. My only concern is with the balance on my mortgage and that has dropped a lot in the past five years. The interest rate on my adjustable loan is under 4%, while I continue to pay extra each month.
My stock portfolio was very aggressive and it dropped by 40%. This really hurt both my psyche and my wallet. It set me back years in my investment plan. But, I took advantage of the low stock and fund prices after the crash to rebuild my portfolio. I doubled the amount of my monthly investment and got myself back on track in a couple of years. I held on to all of my investments, instead of cashing them out at the bottom. My portfolio is now 50% higher than it was in 2008 and I am very happy about that.
The Bottom Line
The bottom line is that recessions and stock market crashes happen regularly. Not only should you plan and be prepared for this, you should try to take advantage of the unique conditions to help restore your wealth.
“The most perfect political community is one in which the middle class is in control, and outnumbers both of the other classes.”
Aristotle – Greek Philosopher
Recommended Reading
Bucksome Boomer – The Power of Saying No to Preserve your Retirement
Krant Cents – What Should you Do?
Money Counselor – American Family Money Status
Thanks for the links, I really appreciate it.
Any time. I enjoyed reading your article.
Sad say, our economy is still struggling that even the middle and upper class were affected. So we need to tight our budget in order to survive.
Hi Eve,
Tightening the budget is usually a good idea. A better idea is looking for more income. It seems like many are struggling and others are doing very well. It’s definitely not an equal recovery.
Hey Bret,
Honored to be included in your Recommended Reading, thank you.
I’m honored to have you Kurt.
It is awful that so many folks have lost a ton of equity in their homes, but there’s another way to look at this. Many of the nicer neighborhoods are eventually going to come back; probably not to the degree that we saw values get to the during the boom, but they will still come back, and the good markets will eventually come back strong. My point specifically is that even if your current home has lost a ton of value, you can likely buy an equivalent or larger home right now at an equally dramatic discount. Even if you have to short sale your current home to get out from under it, its possible your spouse may qualify for the new home on their own and they may not be on the current mortgage, or, you can short sale, wait 3-4 years to rebuild your credit, and then still go out and find a killer deal on a new dream home that is priced well below market value.
Example: My stepfather lost his *ss# in 2008 with his stock investments but at the same time got an awesome deal on a new house which already has over $200,000 of new equity in it since he got it for a steal and that neighborhood is already slowly coming back. For him, he’s slightly up, despite having lost over $150,000 on his investment portfolio in the stock market.
Glass half full, right?, Cheers,
Joe
Thanks for stopping by Joe.
I live in a really nice neighborhood and I remember how hard it was for us to buy a house. If it weren’t for the last crash in the mid 90s, we would probably still be renting.
In 2007, the houses on my street were going for $800-900K. It was way out of control, considering the houses are small and 30-40 years old. If they weren’t at the beach, they would probably be worth $150-200K. They are now worth $400-500K, which seems much more reasonable.
California real estate seems to boom and bust every decade since the 70s. I would just like to see my kids be able to buy houses and not have to move out of state or rent indefinitely.
I actually share the same view regarding my house. I will be in it for years to come. The fact that it has gone up by $100k almost since 2008 (Canada) is of no consequence. Still working on closing that mortgage ASAP as it is the first step towards financial freedom.
Canada’s housing market didn’t seem to crash, like it did here in the States. It’s probably because you guys had better lending and underwriting standards. Here, they would lend $500K to anyone with a pulse. It was a disaster just waiting to happen.
I am counting down the months until I am mortgage-free.
Great article. It’s not easy to bounce back like that. Most people throw up their hands. They don’t often focus on how to solve their problems.
I was lucky in that I saw the stock market about to freefall (I worked in the mortgage industry), so I moved into safe investments. My home was also spared the carnage of the housing market.
Hi JP,
Good for you for getting out early. I know a lot of people in the mortgage industry that didn’t do so well.
I have been through so many stock market crashes that I usually take them in stride. The 2008 crash was much bigger than I expected and I had no choice but to ride it out. I wish I had of moved into safer investments, but I was only expecting a 20% correction.
Very wise management. Buying when prices are low is difficult but the best way to improve your long term wealth. And, great way to look at home equity. Are you worried about a variable rate mortgage for the future? Have you considered refinancing to a fixed?
Hi Barb,
I was so bummed when we bought our house that I couldn’t qualify for a fixed rate and got stuck with an ARM. However, it turned out to be a huge blessing, because the interest rate dropped from 7.5% and is under 4% right now. I saved a ton of money and never had to refi. I owe so little now on the principal that it doesn’t matter if it goes back up. I should have it paid off in about five years, so there is no sense in refinancing now. Sometimes, you just get lucky.
I think you’re wise to realize that home equity is theoretical unless you’re buying or selling, so as long as you don’t plan on selling your home, the drop in equity doesn’t matter. Good for you for realizing this — many people have not figured this out, and feel demoralized because of a number that’s largely imaginary.
You are so right Paula. I know a number of people who were so upset about the housing prices, they let their houses go. In the back of my mind I was thinking, in 5-10 years it will probably come back. Then, it will be 1/3 paid off. Most of the younger folks haven’t seen this cycle before.
I agree with your view on the home. When we bought our home back in 2006, our main criteria was whether we could afford the mortgage no matter what happens to the economy. So far, we had paper gains and paper losses but it really does not matter to us since we are still living in it and it is now fully paid off.
Good for you EFF.
Most people borrow as much as they possbily can qualify for and don’t allow for any changes in circumstances. The agents and brokers encourage this, because it benefits them, not the buyer. I have been laid off twice and never had to sweat my small mortgage.