Edward Wolff, a professor of economics at NYU put together a really shocking median net worth chart over time in 2013 dollars I wanted to share with everybody. The main takeaways are:
1) The median net worth of middle class households has dropped by a whopping 44% since 2007 and has not recovered after the worst was over in 2010.
2) The median household today is 6% poorer than their parents were in 1969.
3) There have been periods of income declines before from 1990-1995, with large rebounds over the next 10 years.
MEDIAN NET WORTH ANALYSIS
Why No Rebound?
The main culprit for the median household not being able to recover since 2007 has to do with taking on too much household debt. I have a couple friends who simply walked away from their mortgages in California back in 2010 because they were so underwater on homes that were so far out of the city center. I can’t really blame them since California is one of the 12 non-recourse states that lets you default on your mortgage without the banks getting to go after your other assets.
If everybody was able to hold on to their property, I’m pretty sure the 2013 bar chart above would look much higher since so many asset classes have rebounded since the 2009-2010 lows. But those people who sold at the bottom probably didn’t get back in quick enough due to liquidity issues or tremendous cynicism towards real estate and stocks. Lesson learned: don’t buy property you can’t afford based on realistic dire scenarios e.g. two years without a job.
I’m personally on a mission to pay off my rental property mortgage I first assumed in 2003. I thought I’d be done with this bad boy in 10 years, but I was wrong. I refinanced the property multiple times and I’m getting sick of the interest payments at 3.375%. In comparison, the 10-year bond yield is under 2.3%, while the best 5-7 year CD I can find is no greater than 2.4%. As a result, I’m fine with using proceeds to pay off the mortgage.
Were Our Parents Really Better Off?
It’s hard to say. My parents were in their mid-20s in 1969. The Vietnam War was full blown, so 1969 was definitely not a time of peace and prosperity. I know they were able to go to college and get good jobs working in the foreign service after the war ended in 1975. They were squarely middle class citizens.
When I was in my mid-20s, I was thinking about giving finance up to go back to Hawaii and plant mango trees. I had saved up several hundred thousand bucks through a lucky stock pick and aggressive savings. And I was burnt out and wanted a career change. But a move to San Francisco elongated my time in finance another 10 years until I left in 2012 at the age of 34. My parents and I were both able to afford a car, an apartment, and go to graduate school on our own dime, so I think our comparison is a wash.
Although net worth numbers are stagnant according to the chart, there’s at least been a lot of socioeconomic improvement over the past 45 years for women, gays, and minorities. There’s more freedom for anybody to be or do anything now than in the past. Furthermore, the ability to get very wealthy, very quickly is also greater thanks to technology.
I’m curious to know whether you are wealthier than your parents were at the same age.
Loading ...The Economy Is Cyclical
If history is any guide, the median household net worth should tick back up beyond 2013. However, the fact remains that income growth has performed poorly compared to the cost growth of many important items such as tuition, food, and housing. Furthermore, you’ll probably never see tuition and housing return to the costs seen in 1969 like net worth has. At least we can gorge ourselves on cheap electronic goods!
The good thing about our economy so far is that the long term trajectory is always up and to the right. If we hold onto our S&P 500 index funds and homes for a long enough period of time, chances are extremely high we will come out ahead. It’s when we panic sell during downturns that we get in trouble.
My fear is that those who just started investing since 2009-2010 are overly allocated in stocks and property. They’ve never seen a downturn, and therefore don’t really know what their risk tolerance is. Having an appropriate net worth allocation is important to grow your wealth during good times, and keep your sanity during bad times.
EVERYBODY IS FALLING BEHIND THE RICH
The top 0.1% own just as much as the entire bottom 90%!
One of my wealthy friends is spending $5 million remodeling his enormous 8,000+, Victorian home he purchased in 2004 for $5.25 million. I told him he was nuts spending that much money during our tennis match and he said “he’ll be alright.”
I remember thinking to myself years ago, maybe one day I could potentially afford a $5.25 million home if I made it big as an entrepreneur. I’ll obviously never be able to afford that price as an average banker. But very recently, his 4,800 square foot neighbor sold for a whopping $11 million, making my friend’s house worth probably $16 – 18 million dollars!
My relatively piddly earnings and investments will NEVER catch up to that type of asset growth. It’s not like I need an eight bedroom mansion in Pacific Heights. I’m just illustrating a point that where I once had hope, I’m now priced out, probably forever. My only hope is that Golden Gate Heights gets “discovered” and becomes the next Pacific Heights in 15 years.
Everything is relative when it comes to personal finance. For those of you who have much greater net worths, you should be grateful and cognizant there are plenty of households who are not getting ahead. For those of you who mirror the data in the chart or come up short, you must make sacrifices in order to get ahead. If you’re doing what everybody else is doing, you’re going to end up like everybody else.
Real median household income hasn’t gone anywhere in 20 years!
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Updated for 2018 and beyond. The reason why the median household net worth has gone nowhere is because not enough people have invested outside their primary residence. Even worse, there are people who have just rented and held cash through this recovery.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
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[…] know that the median household net worth has gone nowhere in the past 40 years. Furthermore, the median household income has been going straight down since […]
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[…] The EPI is a liberal, non-profit, think tank based in Washington DC, which has been around since 1986. The entire goal of their report is to highlight the rising income inequality between the rich and poor over the decades. I think they’ve succeeded in making a point that the government should do more to redistribute wealth to make society more equal. We all know the wealthy have gotten really wealthy during this bull market given they hold the majority of stocks and real estate in our country. The middle class and poor have fallen behind because income growth has gone nowhere over the past 45 years. […]
Ed Wolff’s numbers are not intellectually honest because the cost of living estimates are not the cost of replacement reproduction. Although Elizabeth Warren didn’t include the costs of courtship, divorce, etc., she did show that “the cost of living” figures paraded around in these longitudinal studies of the middle class aren’t just wrong — they’re obscene crimes against humanity as they contributed to the loss of replacement reproduction which, in turn, has been used to “justify” dissolving the people and electing a new one. That’s not merely genocide — its replacement.
Now that I’ve been so very mean to the innocents of the economics profession, I’ll provide them the best excuse I can: The “Iron Law of Wages” is typically phrased in terms of “subsistence”. However, “subsistence”, historically included replacement reproduction. So the economists were simply caught unawares as reproduction ceased being a natural part of subsistence over the last generation or two.
This is fascinating. I would actually find it a little heartening if median/ middle class household net worth has truly held even (I agree with you that it is hard to answer that question just by looking at the most recent year). Reason: household net worth is net worth relative to households, not adults and singles make up a much larger share of the adult population than they did historically. Given the decline in adults-per-household (plus the loss of the economies-of-scale benefits of marriage), I would have expected middle class household net worth to have decreased over time. I would like to know how hours-worked-per-week-per-household have changed over time. If that has gone up (say, due to women’s increased participation in the labor force) despite adults-per-household going down and net worth staying flat, we have a problem.
This is the problem with statistics: once you bring them in, everyone wants more :)
“Economists often use statistics as a drunk uses a lamppost…more for support, than illumination!” – Andrew Lang
Hi Claire, a good place to start might be with the US Dept of Labor, Bureau of Labor Statistics https://www.bls.gov/ces/tables.htm There are some relevant tables (B-1, B-2…) for your use, that show number of work hours per week, and millions employed. You could then divide the working adults into the figure of combined working and non-working adults, and be disappointed at the lowest labor-participation rate in more than 30 years. Divide the number of adults into the number of households, and you will have your hours-worked-per-week-per-household. And that quote was a joke, of course, every single number in those statistics involve a real, live, human being with a story-and-circumstance.
Thanks JayCeezy! I wasn’t able to find historical info on work hours. I also couldn’t find changes in adults-per-household over time (surprisingly enough).
However, I was able to find out that married households make up just 49% of all households, now, compared to 71% in 1970. “How much” that decline in marriage has cost us in terms of household net worth is hard to figure and depends on how much of a benefit marriage is to net worth. One way to quantify it would be to compare the median net worth of married households to unmarried ones. Again, I couldn’t find historical data, but today married households have a median net worth of 5-5.5 times that of non-married households. (5.5. is the “real” number; 5 is the figure if we’re comparing apples-to-apples by looking at households of similar ages side-by-side).
Assuming the 5x figure, one would expect household net worth to be about $19K higher than it is today IF 1970’s marriage trends had held. In other words, it may be that our households have $64K rather than $83k because we have smaller households and aren’t taking as full advantage of the benefits of marriage as we used to.
Even if we assume that marriage yields no net economies-of-scale benefits and predict married households to have just 2x (for two adults) the net worth of non-married households, the “missing net worth” comes out to $8K. (Translation: even if marriage provides no “benefit” other than an extra owner of wealth, today’s households would have a median net worth of $72K rather than $64 if marriage trends had held).
I know the rise in same-sex and cohabiting couples throws a wrench in all of this, but that’s the best I can do for now!
Claire those are some interesting numbers. Married households have 5x not 2x the net worth. That means something else happens aside from additive and cost sharing.
Claire, you might need to get creative.
Here is a table of number of US households from 1960-2013 (52,799,000 – 122,459,000). https://www.statista.com/statistics/183635/number-of-households-in-the-us/
Here is a table with US pop. by age, including over 18.
A great resource for ANYTHING (i.e. crop imports/exports, electronic imports/exports, education levels, immigration levels, jobs increasing/decreasing by field, manufacturing, etc.) is the Statistical Abstract of the United States of America, found online and in two huge binders updated yearly in your local library.
btw, it is one thing to be curious about statistics, but quite another to put the statistics to a useful conclusion. Have fun!
Much much better off than my parents. My net worth is 15x theirs, and they passed 15 years ago. Father was a research eng at BellLabs, which suffered during deregulation. I went into nuclear eng then management. Management is where the payoff is for engineers. Was able to retire at 50. Could have double my. Wealth in the next 5 years but who needs the hassle?
Stagnant wages….. The middle class has lived through about 20 years of stagnating wages.
Becoming wealthy takes excess income! Median US household earns around $52,000/year.
I forgot to add:
In terms of my childhood and my parents wealth at that time; we lived well.
My parents ran a successful small business, drove two relatively new cars, had a custom built brick home, and took frequent vacations (places like Australia, or Hawaii). They would also going out to nice restaurants/bars with their friends every week (interestingly, their friends were all business owners too!).
In nominal terms, I believe I have much more wealth, but in lifestyle, I’m not so sure.
If you’re not sure, then I hope you voted “about the same”!
Oops! Forgot the vote.
Just did that. Sorry Sam.
Born in ’87 here, did our parents have it better? Yes and no…
Yes – Cheaper education, healthcare, food, housing, no extra tech/cable/cell to pay for, plenty of solid jobs, security, benefits and pensions
No – No tech/cable/cell, less creature comforts, harder to get into entrepreneurship with no internet
The average college kid owes like $33,000 getting out of school and it is harder than ever to get a good job these days. I know some pretty smart folks who are unemployed with degrees in different sciences. If folks are first generation college students it is particularly hard to start off. With enough hustle, balls and risks one can find decent employment (see Sam’s post how to make 100k at any age) or start a business and find some financial success. The middle class is shrinking, while the rich get richer and poor get poorer. However, it is now easier to start a biz and make big bucks than ever before… Interesting times we live in!
I remember one of my MBA professors in 1979 asserting that if one made their age in thousands of dollars they were doing well. At that time I thought this wildly optimistic – probably because I was making half that. Not only were salaries low, there were fewer double income households.
I’d make the argument that back in the day, folks didn’t need a dual income household to have a solid standard of living. A lot of this is relative though, as we have much more amenities and creature comforts these days. People didn’t have cable, cell bills etc. back in the day. Houses were smaller and people didn’t have/need 2-3 cars. Different times now.
If they’re smart in the sciences they shouldn’t be unemployed… If they are they didn’t build their résumé, get themselves references, have the grades to back up their smarts, didn’t get internships or perhaps chose a science with too many other students studying it! Engineering has no shortage of great paying jobs out of college for everyone going in!
Engineering is one thing. Virtually everyone I know who went to school for engineering has a job :). I suppose I should be more specific… Let’s talk about biology, chemistry and environmental science majors. Hard to find opportunity with a BA/BS.
I love it when readers reference and older post in a comment, and I get to help the reader link back to that older post. Whoo hoo.
15 years ago, I never would have imagined it to be SO EASY to start a business or set up a website. If a donkey like me can do it, lots of lions can as well!
I also never thought when I graduated from college that making 6 figures would be feasible so early. But the reality is, tech and the internet have made the demand curve HUGE for anybody who wants to create something interesting or valuable.
Nicely said Sam! Provide value and make money.