Housing Crash Continues to Overshadow Young Families' Balance Sheets

ST. LOUIS – The average young family (headed by someone under 40) has recovered only about one-third of the wealth it lost during the financial crisis and recession, while the average middle-age or older family has recovered to nearly its precrisis level, according to new analysis from the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.

According to the analysis, published in the latest edition of In the Balance, a publication of the Center, the main cause of the slow recovery among young households is the housing crash and its lingering effects.  Housing constituted the largest share of the average young family’s portfolio before the crash, so the large decline in house prices had a bigger effect on young families than on older families, who were more likely to have broader asset diversification.

The homeownership rate among younger households has plunged in recent years, reflecting both the loss of many homes through foreclosure or other distressed sales, plus delayed entry into homeownership among newly formed households.  The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by their ongoing retreat from homeownership as they struggle with excessive mortgage debt.

Recent U.S. Census data show that young and, to a lesser extent, middle-age families (between 40 and 61 years old) are leading the retreat from homeownership.  Only the very oldest families, headed by someone age 75 or older, have moved in the opposite direction, increasing their homeownership rate.

As the housing crash unfolded, the homeownership rate among young families decreased from 50.1 percent in 2005 to 42.2 percent in 2013.  Middle-age families’ homeownership rate declined, though not as sharply, from 76.9 percent in 2005 to 72.1 percent in 2013.  Older families (age 62 or older) actually increased their homeownership rate after 2005 by almost a full percentage point.

The decline in homeownership rates for the young and middle-age groups is ongoing, and it appears unlikely that the overall homeownership rate will return to its peak level any time soon, if ever.  While it is reasonable to expect that, at some point, the homeownership rate will stabilize for the individual age groups and the population as a whole, the sharp increase in homeownership rates across all age groups during the pre-recession years may be a thing of the past.  This is because 2004-06 represented unusual conditions in housing and mortgage markets that we may never see again.

“The collapse of the housing bubble had severe consequences for millions of young families, who had too much housing in their portfolios and too much mortgage debt,” said William Emmons, coauthor of the report and senior economic adviser for the Center.  “The ongoing decline in the rate of homeownership represents a painful but necessary rebalancing of young families’ portfolios.  Their balance sheets and the economy as a whole will be stronger in the next inevitable downturn if they have a greater amount of liquid assets, broader asset diversification and less debt.”   

The issue of In the Balance described here is available at http://www.stlouisfed.org/publications/itb/.