Q: Can families recover the net worth they lost from 2007 to 2010 in the expected economic upturn? If so, how many years will it take?
Panel's answer: Yes 2 No 6
Marney Cox, San Diego Association of Governments
According to a report from the Federal Reserve the median net worth of a typical family fell to $77,300 in 2010 from $126,400 in 2007 as a result of the deepest recession in decades. The largest portion of this decline was attributed to a decline in the median amount of home equity, dropping to $75,000 in 2010 from $110,000 in 2007. But the alleged net worth from home equity was never real; it was a paper illusion, brought on by a housing bubble. Unfortunately, many households bought homes or borrowed against these inflated values, and now they are underwater, owing more than their home is worth. Recovering the “lost” net worth would mean returning homes to their 2007 prices; not going to happen anytime soon.
The “expected economic upturn” is already faltering. Instead of real recovery providing productive jobs raising living standards, the phony contrived recovery is producing neither. By attempting to preserve the broken system through deficit spending to avoid the necessary pain to fix it is only making the nation’s economic situation worse. Encouraging activity and behavior the market would otherwise punish has discouraged alternatives that otherwise could be rewarded. The market economy needs to be restructured without government’s continual interference. Although the process will be painful for many, like ripping off a Band-Aid, the pain could be over relatively quickly.
Alan Gin, University of San Diego
The decrease in wealth was largely due to a decrease in housing values, which were still at inflated levels in 2007. As the economy recovers, housing prices will increase, but not to the previous bubble levels. A big problem is that the middle class was hit particularly hard, with the worst declines occurring among the middle three quintiles of the income distribution. The largest decrease was among 60 percent to 80 percent quintile, which saw their median net worth decline by 40 percent. By comparison, the median for the top 10 percent increased by 2 percent. The same report showed the middle quintiles also suffering the largest income drops during this period.
James Hamilton, University of California San Diego
Nobody should expect a return to the stock market bubble of the late 1990s or the real estate bubble of the 2000s. A more realistic assumption is that stock and house prices will go up at about the same rate as nominal GDP, or in the neighborhood of 5 percent per year. At that rate, it would take eight years to rebuild the 40 percent loss that the median household suffered in the last downturn. We’re likely to see at least one more recession before I would anticipate a typical real-estate and equity portfolio to return to where it had been in 2007.