The following headline (and a number of variants) went viral this week:
When the federal reserve released their report on the effects of the recessions on consumers, the conclusion included what looks like a grim statistic: Median net worth dropped 38%. The mean (average) fell only 14.7%, so many of the headlines are either erroneous or a bit sensationalized. But that’s not to say the report isn’t disturbing, however.
Median net worth is a measurement of where the middle class is in terms of wealth. And when it falls faster than the average, it means the middle class is shrinking faster than the rest of the economy. And that’s not a good thing. To make matters worse, incomes dropped most dramatically for the middle class as well.
If there was a lone bright spot in the report, it was the reduction of debt balances during the recession, particularly credit card debt. Although because net worth decreased so dramatically, debt as a percent of assets still managed to increased about 2%.
Housing prices are driving the losses
The main cause for the drastic drop in median net worth is the drop in home values. Those with homes as a large percentage of their net worth saw the most dramatic losses. So it should come to no surprise that the middle class were the hardest hit. But it’s not so simple as just the value of a home dropping by 40%. Because the ratio of principal debt to home value before the recession was high, even a relatively small drop in home value can have a larger impact on overall net worth. Even as principal balances decline.
What to do if you’re among those hit the hardest
Don’t panic – The world hasn’t come to an end. There are proactive steps that can be taken to try and dig yourself out of the current hole you’re in. The key thing is to keep a level head and start assessing your options. It may mean changing your long-term plan and adjusting your goals or retirement projections. One thing is for sure, rash decisions can only make matters worse. So first and foremost: don’t panic.
Dealing with debt – One of the best options for families after such a loss is to look into reorganizing or even renegotiating debts, particularly mortgages. Because underwater mortgages and those dealing with reduced income is a common issue, loan modification programs are available as relief. So if you own a home that’s now worth less than you owe, and your monthly payments are getting increasingly difficult to afford, you might qualify.
Other debt relief and consolidation options may also be available to those hurt by the recession. Refinancing your home at a lower interest rate is an increasingly common way to reduce mortgage payments with current rates at record lows.
Re-budgeting – it’s no wonder that during a recession riddled with unemployment and uncertainty about future employment, spending decreases and budgets focus more on paying off debts. Having lost a significant amount of total net worth, it’s a great time to reconsider your budget priorities. In order to reach financial goals, spending may need to be reduced and a focus on savings and principal reduction necessary.
Moving forward – If you happen to be among the lucky who still have equity in your home and a job that pays the bills, even if you’ve lost a significant amount of worth, it’s simply a matter of rebuilding. Home prices may again rebound, and a re-focus on building equity is what really matters now. Other financial plans may not even need to change much, if at all.
If you’ve been hit a bit harder and either find yourself in a hole of debt and/or have payments you simply can’t afford and you don’t qualify for any of the relief above, you will likely have a much more treacherous road ahead. But there are lessons to be learned. And it doesn’t mean you can’t rebuild from scratch if you must. It can be done.