Why Did Young Households Lose so Much Wealth During the Crash? The Role of Homeownership

Recently released survey data related to household financial conditions reveal large wealth losses in virtually every segment of the U.S. population between 2007 and 2010, the most recent years in which the Federal Reserve conducted its triennial Survey of Consumer Finances.[1] Since the deepest economic recession in many decades occurred between December 2007 and June 2009, the 2007 and 2010 surveys effectively represent “before and after” snapshots of U.S. households’ balance sheets for a cross-section of American families.

As detailed in our recent article,[2] the Survey of Consumer Finances reported that the wealth of the median U.S. household in 2010 was 39 percent lower than the median household’s wealth in 2007, adjusted for inflation. The family headed by someone under 40 (henceforth, young households) in the middle of the 2010 wealth distribution likewise had much less wealth than the corresponding median young family in 2007. (See Figure 1.)

The decline in the wealth of a young household measured at the median of the distribution in 2007 and 2010, respectively, was 38 percent. The decline was 20 percent among young households that were members of a historically disadvantaged minority, which we define to be African-Americans and Hispanics, who may be of any race. The median wealth of young households that were not members of a historically disadvantaged minority (including non-Hispanic whites, Asians and other non-historically disadvantaged minorities) was 42 percent lower in 2010 than the median wealth in 2007.

The very large loss of wealth among many young households is notable for at least two reasons. First, many young households are financially fragile. A serious financial setback early in life can have lasting effects on family members, including young children. According to the surveys, the homeownership rate (defined to include primary residences, vacation homes and timeshares) among young families declined about four percentage points between 2007 and 2010 (from 50 to 46 percent). This almost certainly was due, in large part, to foreclosures and other distressed exits from homeownership. The homeownership rate declined by only two percentage points among families headed by someone at least 40 years old but less than 62 (from 77 to 75 percent), while the homeownership rate among families headed by someone 62 or older actually increased by one percentage point (from 83 to 84 percent). Thus, the housing and mortgage crisis appeared to hit young families especially hard and may have long-lasting impacts on their financial positions or in other dimensions.

The second noteworthy aspect of the large wealth declines among young households is that families who were not members of a historically disadvantaged minority experienced much larger wealth losses—in fact, twice as large when comparing their respective medians—than did African-Americans and Hispanics. This is unusual in the survey data; in virtually every other age and education group that we examined, historically disadvantaged minority families suffered larger percentage wealth losses at the median. What was different about young families?

It appears the source of this unusual pattern is related to homeownership and mortgage borrowing. In a nutshell, young families from historically disadvantaged minorities had lower homeownership rates and less mortgage debt immediately before the downturn in 2007. As the economy and housing markets deteriorated, families whose balance sheets were relatively more concentrated in housing and those who had borrowed more to finance homeownership—both more typical of non-minority families—suffered greater wealth losses.[3]

Figure 2 shows homeownership rates for families under 40. In 2007, the overall young-household homeownership rate was 50 percent. The rate for historically disadvantaged minority families was 36 percent, while the rate for non-minority families was 56 percent. In 2010, the homeownership rate among all young families was 46 percent, with minority and non-minority homeownership rates falling to 32 and 53 percent, respectively.

FIGURE 3

Share of Homeowners with Mortgages Among Families Headed by Someone Under 40

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SOURCE: Federal Reserve Survey of Consumer Finance

Figure 3 shows that the way homeownership was financed played an amplifying role in the loss of wealth for non-minority families. In 2007, 90 percent of all young homeowners had mortgage debt outstanding. Among historically disadvantaged minority families, only 85 percent had mortgage debt, while 92 percent of non-minority families had mortgage debt. Because the value of mortgage debt does not decline when house prices do, the financial effect of mortgage debt is to magnify the percentage loss of wealth suffered by the homeowner. This phenomenon is called “leverage.” Just as a physical lever transforms a given amount of force applied at one end into a greater force at the other end, financial leverage transforms a given percentage house-price decline into a larger percentage loss of homeowners’ equity.

In sum, young non-minority households typically suffered larger percentage declines in wealth between 2007 and 2010 than did young historically disadvantaged minority families. This was due to the relatively greater concentration of non-minority households’ balance sheets in housing as well as greater financial leverage in the form of mortgage debt. A higher homeownership rate and greater use of mortgage debt among young non-minority families therefore turned out to have negative financial consequences during the severe recession and housing-market decline of recent years.

William Emmons is chief economist for the Household Financial Stability initiative and assistant vice president of Executive Special Projects at the Federal Reserve Bank of St. Louis. Bryan Noeth is a policy analyst for the Household Financial Stability initiative at the Federal Reserve Bank of St. Louis.

Endnotes

1. Bricker, Jesse; Kennickell, Arthur; Moore, Kevin; and Sabelhaus, John. “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, 2012, Vol. 98, pp. 1-80.
2. Emmons, William; and Noeth, Bryan. “Household Financial Stability: Who Suffered the Most from the Crisis? Federal Reserve Bank of St. Louis Regional Economist, 2012, Vol. 20, pp. 11-17.
3. Emmons, William; and Noeth, Bryan. “Why Did Young Families Lose So Much Wealth During the Crisis? The Role of Homeownership,” Federal Reserve Bank of St. Louis Review, 2013, Vol. 95, No. 1, forthcoming.