Rebuilding Family Balance Sheets, Rebuilding the Economy: A Deeper Look into the Demographic Divide

May 22, 2013

Bill Emmons takes a deeper look at the demographic divide and shows how the financial crisis affected four sample families with different age, income and educational backgrounds. He concludes that young families are much weaker financially after the crisis than they were in 2007; indeed, they are even weaker than they were in 1989. On average, older families are nearly as strong today as they ever have been, despite the crisis. The strongest balance sheets, by a significant margin, are held by middle-aged or older college-educated whites and Asians.

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William Emmons: So just to give you kind of a quantitative image of where the wealth is in our population, look across these three different dimensions. First, in terms of age, from the beginning of these surveys in 1989 up to our estimate of 2012, you can see that young families had a small and actually decreasing share of total wealth over this time. That's partly because the population is aging. So these middle-aged and older groups are becoming larger.

But it's also true that young families, as I showed you, got hit very hard by this downturn. So young families hold a very small amount of the wealth in the economy. In terms of education, the same idea—very, very large dispersion. In fact, the college-educated group, which is somewhat under 40 percent of all families, holds 70 percent of all the wealth. Families that have less than a high school education, as you can see, have a very, very tiny share of the wealth.

And finally, something that hasn't changed very much over the last several decades, 95 percent of all the wealth is held by whites and Asians, which represent about 74 percent of all families. And this racial wealth gap has not changed a great deal over time. So, as I said, there's tremendous diversity across the population in terms of the share of wealth.

So let me give you examples. These are fictional people. These aren't real people, other than just, you know, sort of from a bank of photo images. But I want to contrast the actual shape of the balance sheets of different groups. So I'm going to start. Family A is headed by someone who's 70 years old, white and has a college education. So these in fact are not made-up numbers. These are the average values that we estimate for 2012 for the group that we've called older, which is 62 and over, white and college-educated.

So you can see about $46,000-$47,000 of durable goods, one and a half million dollars on average among this group, which is about 15 percent of the population, in financial and business assets, about $500,000 in a house, on the liability side a total of $88,000 in debt. So you subtract the liabilities from the assets, you get net worth of almost $2 million. That is the average net worth of a family in this category, the older white college-educated.

If you look at those in percentage terms, what I want to really highlight is housing is about 25 percent of assets, and debt is very, very low—5 percent of total assets financed with debt. Okay, I'll bring these numbers back. You don't have to remember them all as we go through.

Family B—this is a family headed by someone who's 50 years old, white, and has a high school education. So you can see, all these numbers are a little bit lower on both sides—well, on the asset side, not so much on the liability side, very similar. And if we then look at the percentages, you can see that housing now is 38 percent of assets. These are the average values for white families with a high school education between the ages of 40 and 61. That's what these are, specifically. 25 percent of assets financed with debt, so significantly more debt than that first family.

Third, let's look at Family C. This is a family headed by a 35-year-old African-American with a college education. So you can see those numbers are lower again. And here, what's really striking is the age dimension. And I'm going to show you another young family in just a moment.

So the values are significantly lower on the asset side. But in fact the liabilities are significant. So in this case, 63 percent of assets in housing, 77 percent of assets financed with debt. So you can already see that this means that these families are very differently affected by changes in house prices, changes in financial conditions generally.

And then, fourth, the last one I'll show you, this is a family headed by someone who is white, 35 years old, and did not finish high school. So you can see these numbers are significantly lower. Of course, this family's income is much lower also. And if we look at the percentages, 60 percent of assets in housing. What's notable here too is 21 percent in durable goods. Remember that Family A only had 2 percent in durable goods. And 68 percent of the assets are financed with debt.

Okay. So now, summarizing, the net worth difference between the first family we looked at and the last is a factor of 110. So that first family represents a group—and these are averages for the group—is 110 times wealthier than that last group. So that's really—these are both white families, so you can see what's really driving it is the age difference and the education difference. They both matter.

The second thing I want to point to is that share of housing in the total assets. The third and fourth families had a significant share of all of their assets invested in housing. And, of course, this is after the decline in housing values. We have looked at the values. They were even more skewed before the downturn when housing values were much, much higher.

And then, finally, the debt to assets in groups C and D, or families C and D, are much, much higher than those in A and B. So these are financially more fragile and less stable families. So it stands to reason these are exactly the families that are going to be hit hardest by job loss, hit hardest by declines in house prices. They have the least ability to withstand shocks. They are the least financially stable.

So, really, a big part of this project is thinking about how can we help families C and D become more financially stable so that they can withstand the shocks, hopefully not as big of shocks as we just experienced, but in any case be more resilient. So, in fact, in those pictures where we looked at the longer-term trends, I made this point that, actually, these differences between the way families experienced the crisis in fact continue longer-term trends. It really was not a sea change. It was a continuation and amplification of trends that were already underway. At least that's what the evidence that we've seen suggests.

So in particular young families—it's obvious from just the limited data I showed you, young families today on average are much weaker financially than they were in 2007. But did you know that they're also much weaker today than they were in 1989? And, presumably, if we could go back further with the same kind of data, we might find that it even goes back further. So this, we think, is one of the most substantial bottom lines of the work that we've done so far, is the significant damage that young families have suffered in this downturn.

At the other age extreme, on average—now, certainly, there's diversity among all of these groups we're looking at—but on average, older families are nearly as strong today financially as they have ever been, despite the crisis. So these are polar opposites. Young families are in the greatest level of financial distress in our data. Older families are near the best situation they have been in, on average.

So in fact the strongest balance sheets by some margin are middle-aged and older white and Asian college-educated families. Now, of course, that's probably not news. But we can document just how stark those differences are and the extent to which those differences, those gaps, have increased during the crisis.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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