The financial crisis decimated the wealth of the average American


The latest round of data from the triennial Survey of Consumer Finances reveals that real, median household wealth in 2010 was just below its 1989 value. That suggests Americans have not gotten any richer in 21 years.

It’s important to understand that this survey gives a snapshot of the population at different points in time. It does not track the asset history of individuals. Most people build up wealth over their lifetime. The average 55-year-old is richer than the average 35-year-old because he earns more and has been saving longer. So you can’t look at the declining wealth numbers and say the average individual is not better off. Median wealth for 35- to 44-year-olds was $90,800 in 1989 (in 2007 dollars). But in 2010 median wealth for 55- to 64-year-olds was $171,200. The news is still grim, though. Given the aging population you wouldn’t expect median wealth for the entire population to decline.

Why has the median net worth dropped so much, but not the mean? To a large extent you can blame the housing bubble. For many middle- and lower-middle-income Americans their home made up nearly all of their wealth. They were largely invested in a single asset that did very poorly in this period. Richer Americans, who held other assets, did not see such large declines. This demonstrates how important it is to diversify your wealth, even when you don’t have much of it. Why did these Americans have so much housing in their portfolio?

Obviously there was the housing bubble and sub-prime mortgages, which made levering up to buy a house too easy. But I think it goes deeper than that. Anecdotally there seemed to be a mentality that you should buy as much housing as you can afford, not as much as you need. That may be because of the pervasive view during this period that housing is always a good investment. That idea coupled with the favoured tax treatment of home ownership created an incentive for Americans to put nearly all of their wealth into a single asset. Unless we see a strong rebound in house prices, many Americans may pay the price for that with a grim retirement.

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