Why Were Young People Hit Harder by the Recession?

May 10, 2013

Younger people were hit harder by the recession than older people. What explains the disparity?

  • One of the biggest factors, a new paper suggests, is the larger mortgage debt young households under age 45 had relative to their assets compared to older people in the run-up to the financial crisis -- and the fact that much of their wealth came from owning homes.
  • Reviewing data from the Federal Reserve, Edward Wolff, an economist at New York University, finds the average wealth of people under age 35 dropped from $95,500 in 2007 to $48,400 in 2010 (in 2010 dollars), while that of people age 35 to 44 shrank from $325,000 to $190,000.
  • Older groups, by contrast, suffered much smaller relative declines.

The reason?

  • The big drop in home prices between 2007 and 2010 meant a 59 percent loss in home equity for people under age 35, compared with just 26 percent for people generally.
  • That meant a massive loss of wealth, or "net worth" -- what people own minus what they owe.
  • People ages 35 to 44 saw a 49 percent fall in home equity.

Younger households tend to have their assets more closely tied to homes than older people, whose portfolios tend to be stock-heavy. As a result, younger people saw their wealth rise more relative to older Americans between 2001 and 2007. By 2007, homes comprised over half the value of total assets of people under age 35, but only a quarter of the assets of people age 55 to 64. So while stock prices fell a little faster than housing prices from 2007 to 2010, younger people still took a bigger wealth hit -- thanks to their mortgage debt and reliance on housing for wealth.

It's not just younger people who suffered disproportionately: Minorities and America's middle class -- defined as the middle three quintiles when wealth is ranked from top to bottom -- experienced similarly outsized drops in home equity and net worth.

Source: Neil Shah, "Why Were Young People Hit Harder by the Recession?" Wall Street Journal, May 8, 2013. Edward N. Wolff, "The Asset Price Meltdown and the Wealth of the Middle Class," Brown University, May 2013.

 

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