Median Net Worth Declines
ROBERT SIEGEL, host:
The rates of employment and inflation are the most common measures we hear of economic well-being or distress, but how well do those indices really measure the anxiety of the American middle class?
A homeowner with a modest 401K and an SUV in the driveway has probably seen all those assets shrink in value recently, so how do we measure that incredible shrinking feeling when a nest egg that looked worthy of an ostrich last year is suddenly worthy of a chicken?
Well, one measure is net worth, something the Federal Reserve monitors, and Scott Hoyt, senior director of consumer economics at Moody's Economy.com, joins us to talk about it. Welcome to the program.
Mr. SCOTT HOYT (Moody's Economy.com): Thank you.
SIEGEL: And perhaps you could begin with a definition. What is net worth and average net worth?
Mr. HOYT: Well, net worth is just the total value of all assets held by consumers, whether that's their home, any stocks they hold, the value of their vehicles and other durable goods, value of their pensions and life insurance. For rich folks, it's the value of any companies that they own or run minus any debt that consumers have, whether it's debt against those assets, like a mortgage, or just general consumer debt like a credit card.
SIEGEL: How, according to the Federal Reserve, how are we doing in terms of average net worth?
Mr. HOYT: Average net worth across all households in the first quarter of this year was $184,000. That's down from a peak in the third quarter of last year of 192 and a half thousand.
SIEGEL: Now, this is an average, so Donald Trump brings it up a lot.
Mr. HOYT: Yes. I wish we had data on the net worth just for average households or a median or something like this, but it is significantly inflated by the very wealthy households in the U.S.
SIEGEL: What do you think it does to people to have that sense that between the stocks in their portfolio or their retirement account going down, the house price going down, and even the value of the car usually goes down, but if it's an undesirable big car now, it might be going down faster; what does that do to people's economic behavior?
Mr. HOYT: Well, generally individuals have goals that they wish to reach for their saving behavior, whether it's, you know, education for their children, their retirement, you know, a new car, a new house, something like that, and when the value of their assets is declining, it makes it much more difficult for them to reach those goals.
Conversely, when asset values are rising rapidly, you have what's called a positive wealth effect, where consumers don't really need to put anything away to meet those goals. They can just watch the value of their assets increase, which leaves them more money for spending.
SIEGEL: When was it a good time in terms of increasing average net worth in the country? What were the glory days of increased net wealth?
Mr. HOYT: Well, really just recently, when we had the run-up in house prices, you know, through roughly 2006. You know, stock markets were doing pretty well also, and household wealth was increasing at a rapid pace.
SIEGEL: That average of $192,000 that we achieved at the end of 2007, that would have been a pretty hefty increase over, say, 2001 or 2002?
Mr. HOYT: Yeah, I mean, for example, I think the low value occurred towards the middle of 2002, when it was only 131,000.
SIEGEL: Wow, so from 134,000 to 192,000, almost $60,000 increase. That's about a 40 percent increase over only about five or six years. We were really getting rich until last December.
Mr. HOYT: Yeah. Yeah, households were benefitting, and as a result they were able to, you know, extract some of that equity in the form of borrowing and spend some of the money.
SIEGEL: And now it went down at the beginning of 2008. The expectation is, given what's happened on the stock market, in the stock market this year and real estate markets, housing markets, we'd assume it's going to keep going down, no?
Mr. HOYT: Yup, and that's clearly going to put a crimp in household finances and their willingness to spend.
SIEGEL: Well Scott Hoyt, thank you very much for talking with us. Scott Hoyt, who is senior director of consumer economics at Moody's Economy.com. He spoke to us from Westchester, Pennsylvania.
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