By Ray Boshara and William Emmons

1. Introduction

Americans, imbued with great expectations and optimism, set several records in the past decade in pursuit of the American dream of homeownership. We had both the highest rate of homeownership and the highest concentration of wealth in housing ever recorded. Millions, including the most economically vulnerable, assumed risky mortgages to purchase these homes and ran up their other debts as well, leading to a personal debt-to-income ratio of 133 percent, an all-time high. And easy access to credit, along with rapidly rising home values, let our personal savings rate plunge to its lowest level since the 1930s.

Leverage was the price we paid, and are still paying, for that American dream. The risk of leverage, of course, is that it can multiply losses. As house prices fell, the balance sheets of economically fragile families were damaged. And while household balance sheets have improved in the past few years—families are rebuilding their savings and paying down their debts—balance sheets have not yet fully rebounded. We estimate that only about 45 percent of the average inflation-adjusted household wealth that was lost since the onset of the downturn in 2007 has been recovered. (See sidebar.)

In this essay, we present new research regarding the damage to household balance sheets resulting from the Great Recession of 2007-09. Specifically, we show which demographic groups lost the most wealth following the recession, and we illustrate how economically vulnerable groups possessed especially risky balance sheets going into the crisis. We then address the importance of balance sheet health at the micro level—that is, the importance of sound financial footing to families. Finally, we review research on the importance of healthy household balance sheets to the economy, and we briefly convey our future research plans on household balance sheets.

Ray Boshara | St. Louis FedRay Boshara is a senior adviser at the Federal Reserve Bank of St. Louis and is the director of the Center for Household Financial Stability. Prior to joining the Fed in 2011, Boshara was vice president of the New America Foundation, a think tank based in Washington, D.C. Over the past 20 years, Boshara has advised presidential candidates; the Bush, Clinton and Obama administrations; and leading policymakers worldwide. He has testified before the U.S. Congress several times, most recently before the Senate Banking Committee in October 2011. Boshara is a graduate of The Ohio State University, Yale Divinity School and the John F. Kennedy School of Government at Harvard.

William Emmons | St. Louis FedWilliam Emmons is the chief economist of the Center for Household Financial Stability. He is an assistant vice president and economist at the Federal Reserve Bank of St. Louis, where his areas of focus include household balance sheets and their relationship to the broader economy. He also speaks frequently on topics including banking, financial markets, financial regulation and the economy. Emmons received a Ph.D. in finance from the Kellogg School of Management at Northwestern University. He received bachelor's and masters degrees from the University of Illinois at Urbana-Champaign.


leverage: In a qualitative sense, leverage refers to the degree to which a family's assets are financed with debt. In a quantitative sense, leverage is defined in this article as the ratio or percent of a family’s debt relative to its assets.

balance sheets: The financial accounting for an economic unit's financial and tangible assets and its liabilities. A balance sheet consists of two columns, containing all assets on the left-hand side and all liabilities on the right-hand side. The difference between the value of assets and liabilities is defined as net worth, or wealth. Net worth can be positive or negative.