The Median Net Worth Plummets To Early 1990s Levels

Santorini CliffThe median US family net worth in 2010 plunged to just $77,300 from a high of $126,400 in 2007 according to the Federal Reserve’s Triennial Survey of Consumer Finance.

$77,300 can’t even buy you two years of private college tuition!  No wonder why so many people think the US is screwed.  The 39% drop in median net worth is stunning, since it puts us back to where we were two decades ago.  Around two-thirds of the drop is due to housing to nobody’s surprise.

What is surprising is that the median amount of home equity dropped to $75,000 in 2010 from $110,000 in 2007.  In other words, the median person has 87%-97% of their entire net worth tied up in property!  This is a recipe for disaster.

One of my biggest tenets is “follow what people do with their money and not what they say.”  The data clearly shows that the middle class loves to role the dice and go for broke.  Can you imagine Warren Buffet having $50 billion+ tied up in housing?  Warren runs a conglomerate and is as diversified as one can be!

GAMBLERS, THE LOT OF YOU!

Betting 87-97% of your net worth in property means the typical US household is a hardcore gambler!  Think about it.  If housing goes to zero, you go to zero.  You will be on government welfare for a couple years, exhaust the remaining 3%-13% in savings you have and then you will go homeless because the banks will eventually take your home!

Of course housing is not going to zero, but your equity surely can.  If you put down 20% and your house price falls by 20%, your equity is wiped out.  So long as you can pay the bills, everything but your mental health will be alright.

Given that we now realize that roughly $75,000 of the $77,000 2010 median US net worth is now in housing, now is the time to buy!  The median US household is scared shitless!  And when people are scared shitless, they do irrational things like sell things in panic.  Can you imagine having just a $2,000 buffer before potentially losing everything?

All you’ve got to tell the median US home seller is that the world is coming to an end thanks to the European debt crisis, and you’ll probably be able to spook them into giving their house away!

Furthermore, if you are in a profession that sells your knowledge and skills (accountants, architects, mortgage intermediaries, insurance brokers, consultants and financial advisers), you should probably get professional indemnity insurance against claims by client or third parties who feel you’ve been negligent or given bad advice.  PII will cover your legal costs as well.  You don’t want to work hard all your life and lose what little net worth you have outside of housing!

CANCELING MY HOME SALE EXPERIMENT

The Facebook IPO was a flop and homebuyers are still quite cautious even here in bull market San Francisco.  As a result, I’ve decided to discontinue my pocket listing experiment with an asking price that is around 5% higher than market.  I’m wasting my time given there are too many bargain hunters out there who come to the same conclusions I have about median household net worth.  Now is the time to buy, not to sell.

It’s amazing to read from the Fed that the share of families saving anything over the previous year fell to 52 percent in 2010 from 56.4 percent in 2007.  Is everybody still partying like it’s 1999?  At least the share of families with credit card debt declined by 6.7 percentage points to 39.4 percent, and the median balance of that debt fell 16.1 percent to $2,600.  Furthermore, there has been a healthy recovery in the markets and the economy since 2010.

I’m thankful for being able to refinance my primary home mortgage to 2.625% despite the process taking around 100 days.  I think I’ll just continue to happily live in my house for at least another 3-5 years and enjoy the “privilege” of  paying such a low rate.  I believe both the real estate market and the stock market will be higher in 3-5 years time.

Unless you truly are a hardcore gambler, consider diversifying your net worth more evenly between fixed income, equities, real estate, and CDs.  Real estate is currently about 30-35% of my net worth, and it will never go above 40%.  If everything goes to hell, I will still be able to live off 30% of my net worth which is in stable investments with FDIC guarantees such as CDs.

RECOMMENDATIONS

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Regards,

Sam

Photo: Santorini Cliffs, SD, 2011.

 

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. James says

    Net worth pointing rightwards and upwards, for now.

    I’m curious what the rental property investors thing and how much of their net worth is tied up in property. Sure, they can collect rental income, but that’s the same argument as dividend investors that say they don’t care about the value of their asset…

    • says

      Good question. The difference is, when cap rates come down, the value of rental properties goes up.

      Rents are going up, but so is the value of rental property since the 10-year yield has more than halved to 1.65%.

      For example, $30,000 a year in rental income divided by 5% = $600,000. Now divide by 2% = $1.5 million value for your rental property!

  2. says

    My net worth gets better everytime I make a payment on my house. Mostly because I’m underwater (according to zillow, which I don’t fully trust). My house has drug my entire net worth to a negative amount. Right now, I’m just trying to increase my income, but you’re totally right, if my equity doesn’t come back, I may have made a horrible bet on the housing market. Nice thing is, I plan on being there for 10 years, so I am betting on the market to recover by that point.

  3. says

    My net worth wasn’t very high in 2007 because I was in college :) It is much higher now :) Unfortunately most people don’t make financially responsible decisions so their net worth stagnates I feel. Buying expensive cars and trading them in every 3-5 years will do this to you.

    • says

      Nice, only upside for you then!

      I did the car buying thing, but they were all cheap and some I even made money. Sick of going to the DMV though, so I stopped, especially since I found Moose.

  4. says

    Wow I didn’t realize it’s dropped by 39%! Wow! Mine has gone up because I got promoted and am working more than one job now. So I’m a lot busier than back in 2007 because I’m working more hours and thankfully my financial situation is better!

  5. Money Beagle says

    Our net worth actually fell between 2007 and 2009. But, our household net worth has gone up 50% from 2007 to 2012.

  6. says

    Those are some pretty interesting numbers. A 39% drop is quite a bit. In my case since 2007 my net worth has increased steadily. Slowed down at bit in 2008 as I took a pay-cut during the economy down turn. Ever since 2010 my net work took quite the up spike. Promos at work, year end bonuses, spike in the value of my condo, debt elimination, and continued increases in side income through my two side businesses.

    Last year alone I was able to increase my income 23%. I’ve never been the type to talk how much I make, I stick to percentages, especially after I re-read your post yesterday, and emailed someone the link – “Never tell anyone how much you make”.

    Cheers!

  7. says

    Our net worth have been on a steady climb. There are dips, but over the long term the trend is good. Our real estate holding is probably about 30% of our net worth as well. If the market recover, I can see it go up to 50%.

  8. Jonathan says

    These numbers are so misleading. Setting aside home values for a moment, a lot of people seriously were “suffering” in 2009-2010 because the values of their retirement investments had dropped precipitously. (I put “suffering” in quotations because, unless they were in or beginning retirement at that point, it doesn’t really matter what the current values of those accounts are). Now, those who didn’t panic and sell everything are pretty much back to the levels they were prior to 2008. The study only goes to 2010 – there’s been huge market growth in the past couple years. The news is scaremongering.

    Now, for someone who did have their net worth tied totally to the value of their house, it can be a different story as housing has not made much of a recovery (if any) from its low.

    • says

      Jonathan, I agree with you completely as we’ve now had a couple more years of recovery in the markets, real estate, and savings…. I can see net worth declining from 2007 to 2010… but now that we’re back to 2012, I have to imagine things are at worst flat since 2007.

  9. says

    how does your median net worth now compare to that in 2010 and more interesting, in 2007? I don’t know about 2007 but since January 2011 I am up over 100%…

    I can see how there has been a drastic decline since 2007, but I don’t see how the SAME people’s net worths in 2007 are down after 5 years of working, saving, and investing.
    – BECAUSE AMERICANS AS AN AVERAGE DO NOT SAVE!

    How did your friend-realtor take the news?

    • says

      I just don’t believe the average American doesn’t save. That is completely irrational, which is why I think most people have a higher net worth now than 2007.

      Did you not know your NW in 2007?

      • says

        You and I never come together on the rational/irrational discussion of society so won’t start that again lol.

        I didn’t know my Net Worth in 2007 because I never bothered to calculate it nevertheless store it. I finished school in 2006, got married in 2008 and it wasn’t until after 2008 when I started to take my financial well being seriously.

        • says

          Gotcha.

          People who don’t need money and/or like to work forever don’t save money. To do contra doesn’t make sense.

          I’ll write a post about my real estate adventure later.

  10. says

    1. I tried to leave a comment this morning and was redirected to some adult site. It was quite the eye-opener so I thank you for the early morning arousal.
    2. I agree with Jonathan’s points above.
    To add, I could completely understand if the average Americans net worth hasn’t increased. Over the past few years, I have encountered far too many people that prefer to pay down their mortgage than their credit cards.

  11. says

    I used to track my total net worth, but outside of my home, the bulk of my net worth is a combination of my 401k and my personal stock portfolio so that’s what I track closely. The ups and downs of these portfolios from 2008 to the present is a pretty staggering graph. I’ve lost – on paper – a lot of money and I’ve gained – on paper – even more. I’m used to the wild swings now, in fact I am glad I’m young and have gone through a recession invested fully because they don’t phase me. Most investors either pull out their money at any sign of market distress or don’t add new money to their portfolio when there are market corrections when they should stay invested and be adding to their portfolios. There were so many bargains out there during the depths of the recession, everything was on super sale!

    Mr. Everyday Dollar

  12. says

    Since I’m in the prime of the accumulation phase of my life, my net worth is roughly double what it was is 2007. It’s about 30% higher than 2010 as well. I have some real estate, but it’s definitely not 97% of my net worth!

  13. says

    I was surprised to learn about this today. Like you said, around 2/3rds of this drop is due to housing. People didn’t diversify enough (~_~) However the US didn’t do nearly as bad on other economic numbers like wages and gdp per capita during the same period. Which means people may be house poor but they are still relatively income rich. I don’t think the median person’s lifestyle was diminished by 39%. Perhaps this fall in net worth is only a loss on paper and not all that bad. Maybe the flow of capital is more important than what a country is worth. America has gone through worse times than this. I’m sure if people continue to work hard, save, buy homes, and invest, then the median net worth shall one day reach new highs. My net worth was about negative $15K in 2007 because I was still in school and took on student debt. In 2010 it grew to roughly $50K. And today, it is a little over $110K.

    • says

      That’s quite a jump! Achieving a $110K net worth in 5 years out fo school is nice!

      2010 was still a rough year. I’m sure their 2013 report will paint a much brighter picture.

  14. Squirrelers says

    While mine is moving in the right direction, I am not entirely surprised that things have gone way downhill for some people. There have been so many people that “stretched” to buy homes as the market went up, that they are simply screwed now that the bottom fell out of the market and they are underwater. They aren’t going to be selling, and they better hope that they protect and increase their income. Some aren’t getting raises, or have simply lost their jobs and can’t get comparable ones.

    Plus, there are some areas of the country that have been pummeled by the economy and the real estate market. I have family in the Bay Area where you are, and they live in an alternate universe to the rest of the country it seems :) So not everybody is suffering, many are actually prospering big time.

    Also, I do think that the average American, sadly, is stuck in the mindset that was prevalent in an era of economic dominance of yesteryear. I really think that many people just assume they will be fine, and that someone will be there to bail them out. Moreso, I think there are too many people that feel “entitled” to a certian lifestyle. Hence, the overspending on housing as a % of income. I read something this week about how homebuilders are now seeing an uptick in the number of larger homes being built. Surprise! The McMansions are back.

    I agree with you on the notion of diversifying assets, and in specific the idea that real estate shouldn’t be anything close to 80%+ of one’s net worth as the data suggests.

    • says

      Hmmm, and uptick in McMansions… a bullish sign!

      Yeah, being underwater really drags down everything else and skews the percentages. I’m sure the 2012/2013 figures in the next survey will show a nice rebound.

  15. says

    Interesting thoughts sam – Even though my networth is much higher than it was in 2007, that’s because i was a student then and not really working. I just bought a house so my debt level went up, but such is life. A great rate is something I’ll never complain about!

  16. gold666 says

    My NW is way up from 07 due to being in accumulation stage. And I am luckily over double the median. But I have zero home equity (and no real estate position at all). I like mobility. How do you feel about using housing-related stocks or some other strategy to hedge against NOT owning real estate? I rather like not owning, it just suits me I guess. I also don’t like having a big illiquid assets. I know there are advantages to it though. Anyway having no interest in owning RE was beneficial to me since it prevented me from buying at bubblicious prices and watching them sink, but now I risk missing out on upside. But that 6% transaction charge, closing costs, etc really forces one to stay put for awhile.

    • says

      Transaction charges are a a real bummer when selling, which is why I don’t want to sell! lol.

      Sure, buying REITs and homebuilders is a way to get the exposure.

      The problem w/ just having cash is that the returns are horrible.

  17. says

    I personally also like to keep 10% in physical gold. I understand that the mainstream hates gold, and that there was a bubble that blew up in the 1980s, but let me ask you: do you think Ben is going to go Volcker on us? I didn’t think so.

    I look at it as a currency, not as an investment — Warren Buffett is right in that sense. However, his logic doesn’t explain why CBs and private citizens of considerable wealth continue to hold and accumulate gold. The U.S. is now spewing out more than $4 billion a day that needs to be mopped up… and if will be mopped up by the Fed if it won’t be by others.

    If I’m wrong to the biggest degree and gold became worth $0, worst that happens is you lose 10% of your worth — far worse things have happened in the stock market and elsewhere.

  18. says

    Is this true? How about 401(k) or retirement savings? I can’t believe that average American is not saving any money for retirement if 87-89% of their worth is their home. I agree with your overall thinking Sam, but I’ve learned long time ago not to predict which way market and economy will end up in even a year, let alone 3-5 years. No one knows.

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