Fed Calls Gain in Family Wealth a Mirage

http://www.nytimes.com/2009/02/13/business/economy/13fed.html?_r=1&ref=business

By EDMUND L. ANDREWS
Published: February 12, 2009

WASHINGTON — The leap in wealth that Americans thought they were enjoying over the last several years has already turned out to be a mirage, according to new estimates by the Federal Reserve.

In its triennial survey of consumer finances, released Thursday, the Fed found that the median net worth of American households increased by a seemingly healthy 17 percent between the end of 2004 and the end of 2007.

But the gains were wiped out by the collapse in housing and stock prices last year. Adjusting for those declines, Fed officials estimated that the median family was 3.2 percent poorer as of October 2008 than it was at the end of 2004. The new survey offers one of the first glimpses of how American families were positioned financially as the roof fell in on the economy, and it provides some sense of how much wealth has been destroyed since then. Indeed, the destruction of wealth is still in full swing: housing prices are still falling, more than two years after the bubble peaked.

The survey suggests that the boom years were not all that wonderful even before the crisis set in. And it indicates that many households will have to greatly increase savings rates, which were below 1 percent, to make up for some of the lost wealth.

Adjusted for inflation, the median household income actually edged down slightly over the three years ending in 2007. The mean, or average, household income jumped by a respectable 8.5 percent.

But a growing share of that income came from investment profits rather than from wages and salaries. And the wealth that Americans were building was overwhelmingly in the form of paper profits that vanished as quickly as they had appeared.