Demonstrators demanding a halt to foreclosures in Michigan surround the lawn at the Lansing State Capital Building on Sept. 17, 2008. The rally called for the passage of SB 1306 immediately. (Photo: Alan Pollock).
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Americans See 18% of Wealth Vanish
By S. MITRA KALITA
Wall Street Journal
The wealth of American families plunged nearly 18% in 2008, erasing years of sharp gains on housing and stocks and marking the biggest loss since the Federal Reserve began keeping track after World War II.
The Fed said Thursday that U.S. households' net worth tumbled by $11 trillion -- a decline in a single year that equals the combined annual output of Germany, Japan and the U.K. The data signal the end of an epoch defined by first and second homes, rising retirement funds and ever-fatter portfolios.
Past downturns have been mere blips compared with the losses Americans faced last year, which set them back to below 2004 levels. "In the postwar period, we've never had anything other than very modest declines. That life experience led many people to think that houses were a one-way bet," says Douglas Cliggott, the chief investment officer of Dover Management LLC.
The decline in Americans' net worth, which was the first in six years, follows an extraordinary boom. Not accounting for inflation, household wealth more than doubled from 1990 to 2000, and then, after a pause, rose nearly 50% before the bust of 2008.
While the value of their assets was falling, Americans' total debt remained roughly flat. Total household debt increased by half a percentage point in 2008 as families faced tighter lending standards and many started trying harder to live within their means. After years of splurging with an eye on their rising assets, that phenomenon, known as the wealth effect, now cuts the other way, spurring frugality.
Dawn Cortese, a mother of three boys, recalls the giddy days when she worked as an account executive for Pfizer Inc. and its stock price surged on sales of hit drugs such as Viagra and Lipitor.
"I'd look at my 401(k) and we'd feel comfortable, happy.... I was never very cautious," says Ms. Cortese, 40 years old, of Oakland, N.J. If her boys and their friends wanted burgers or pizza after a roller-hockey game, she obliged. A cleaning lady scrubbed her four-bedroom house and a landscaper mowed her lawn.
Eighteen months ago, Ms. Cortese quit Pfizer to start an event-planning business. She did well initially, turning a Sweet 16 party into a Hollywood set with lights and megaphones one weekend, or a country-western retirement party with a rodeo bar and mechanical bull the next. But last fall, business dried up. Her party props began to collect dust in the basement.
She has moved on to a new business: selling skin-care products through Arbonne International LLC, mostly through word of mouth and catalog sales.
Ms. Cortese's husband, Chris, says his job at a corporate-trade company is relatively stable. But the two are looking to get back on a firmer financial footing.
They've put their house, a gray McMansion in a development carved out of a mountain, on the market, for $799,999 -- $100,000 less than it was worth a year ago, Ms. Cortese says. The family's total portfolio, including stocks, retirement plans and college funds, is down 35%, the Corteses say.
"Even though my husband has a good job, I'm just looking at our portfolio and trying to do what's best," Ms. Cortese says, citing coupons and cooking at home as new survival tactics. If they can sell the house, they have their eye on a less-expensive property or would be open to renting for a few years. "My dad always said, 'Dawn, live below your means.' That's what I am trying to do."
Overall, the quarterly Fed report, known as the flow of funds report, underscores the new strain on the U.S. consumer: Mortgages and credit-card debt alone totaled $13 trillion, or 123% of after-tax income. In 1995, for instance, it was 83% of income.
Collectively, homeowners had 43% equity in their homes -- the lowest level since records have been kept. Amid foreclosures and tighter lending, the total amount of mortgage credit was down last year for the first time since the Fed started keeping track in 1945.
The recession that began in December 2007 has reversed a particularly long boom. "What's misleading about this being the biggest drop is that it was preceded by one of the biggest rises," says David Backus, an economics professor at the New York University Stern School of Business. "Even where it's come down to is not a low level compared to the last 50 years of history."
In all, the net worth of U.S. households stood at $51.48 trillion at the end of 2008, the Fed data showed. Besides being down 17.9% from a year earlier, it was down 9% just from the third quarter.
The net-worth figure encompasses all of families' assets -- housing, stocks, personal property -- minus their total debts.
Americans' assets have taken further hits in the first two months of 2009, a period not covered in the quarterly report.
Although stocks have risen for three straight days, they remain down roughly 16% since the fourth quarter, when Americans' portfolios of stocks and mutual funds were worth $8.76 trillion.
The national median home price, meanwhile, was $170,300 in January, down nearly 15% from a year earlier.
Among those hurt are small-business owners.
"Many people in the small-business sector were putting up their house" as collateral, intertwining their personal and business credit, notes Jane D'Arista, a research associate at the Political Economy Research Institute at the University of Massachusetts-Amherst. For many, "there's no channel for credit now," she adds. "The hit to the American family is so broad and so deep."
Deidre Helberg in Freeport, N.Y., once owned two homes, operating a day-care center out of one. She sold that home and business and put the profits into a business called Helberg Electrical Supply. "That money's all gone now," she says bitterly.
The past few years, while mostly profitable, were a game of juggling working capital and credit. "If you don't have capital, your credit rating is shot," she says. "And if you do have capital, you're supposed to invest it back into the business. That's part of the sacrifice, and there is not one company in America that has not gone through that sacrifice."
The process has wreaked havoc on her personal credit, as late fees accrue on mortgage payments.
Her son, a high-school senior, wanted to attend a private college but now is looking at state schools.
The last straw came late last year when Ms. Helberg was turned down for a credit line badly needed to pay a vendor. "I had $2 million in sales revenue and couldn't get $50,000," she says.
Ms. Helberg is hoping the Obama administration's stimulus package and "green" focus will help, noting that she sells solar panels, wind turbines and energy-efficient street lights.
Signs are emerging that Americans, in ways big and small, are pulling lessons from their collapsed empires. Of 46 economists responding to a recent Wall Street Journal survey, 43 predicted the new era of thrift will persist beyond the end of the recession.
That's evident in the Cortese household. The other day, Ms. Cortese says, her son asked if they could go to Abercrombie & Fitch, the retailer.
He didn't need anything in particular, "just wanted to go shopping," she recalls. She told him no.
And when her boys get their allowance weekly, it comes with a message.
Spend a little, give a dollar to church and, their mother advises, "put the rest in the piggy bank."
Write to S. Mitra Kalita at mitra.kalita@wsj.com
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