Study: Mortgage meltdown will cause massive losses in household wealth
July 10, 2008
• Plummeting prices leave millions dependent almost exclusively on Social Security for retirement
• An ‘extraordinary destruction of wealth’
Due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth and will be almost completely reliant on Social Security and Medicare to support them in their retirement years, according to a new study by the Center for Economic and Policy Research.
The study analyzes the wealth holdings of families in all age groups in 2004 and projected the wealth of these families in 2009.
The findings predict that even if housing prices were to remain at current levels, the vast majority of families will have little or no housing wealth in 2009.
“This extraordinary destruction of wealth will have tremendous implications for millions of families,” says report co-author Dean Baker.
“Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce,” he says.
The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004.
These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.
If real house prices fall 10 percent, the median household in the 45 to 54 group will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent, the report says.
If prices fall by 20 percent, the most pessimistic scenario, families in the 55-64 age group will experience a loss of 49.6 percent of their wealth compared to the same group in 2004.
“Policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear,” says Mr. Baker.
In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board’s 2004 Survey of Consumer Finance. They also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.
The Center for Economic and Policy Research describes itself as an independent, nonpartisan think tank “that was established to promote democratic debate on the most important economic and social issues that affect people's lives.”