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Cascade: No. 64, Winter 2007 — Special Issue: Financial Literacy

Changes in Family Finances

Since consumer spending represents a large percentage of total expenditures in the U.S., our economy’s financial health depends, to a large extent, on the financial well-being of the nation’s households. Monitoring the finances of U.S. families offers a useful window on the vitality of our economy. The Federal Reserve Board’s Survey of Consumer Finances (SCF) provides a highly useful data source for tracking households’ financial trends. Thus, the SCF is a valuable resource for researchers and others interested in the finances of U.S. families. In their article, Brian K. Bucks, Arthur B. Kennickell, and Kevin B. Moore examine changes in family finances between the 2001 and 2004 surveys.1 What follows is a summary of their findings.2

The Survey of Consumer Finances

The Federal Reserve Board, with the cooperation of the U.S. Department of the Treasury, sponsors the SCF. Since 1992, the National Organization for Research at the University of Chicago (NORC) has conducted the SCF every three years.3 NORC surveys about 4,500 families that are selected to be representative of families from all economic strata. The SCF contains a wealth of information on families ranging from demographic variables to a detailed account of household budgets covering income, assets, debts, and major financial transactions.

Changes in Family Finances

Economic Environment

Before we discuss the changes in the finances of U.S. families reported in the SCF, some background on the economic climate between 2001 and 2004 is in order. Over this time frame, the U.S. economy experienced a mild recession during most of 2001, but growth in the nation’s total output (real gross domestic product) picked up in 2002 and recorded greater gains in 2003 and 2004. The rate of inflation “was moderate by historical standards over the 2001–04 period,” while “the unemployment rate, which had peaked at 6.5 percent in mid-2003, fell to 5.1 percent in 2004.”

According to the authors, most interest rates declined early in the period but started to rise near the end of 2004. These movements in interest rates affected such consumer products as home mortgages, time deposits, and bonds. Moreover, “the national house price index produced by the Office of Federal Housing Enterprise Oversight increased nearly 27 percent from 2001 to 2004,” and homeownership continued to increase gradually.4

Evidence of Recent Changes from the 2001 and 2004 Surveys

Given this backdrop of economic conditions, the authors’ examination of the 2001 and 2004 SCF revealed some noteworthy changes in the financial status of U.S. families. In addition, the authors relied on the comparative differences between the 1995 and 2001 surveys to place these changes in a broader context.

Income. Between 2001 and 2004, median real family income before taxes (adjusted for inflation) rose 1.6 percent (Figure 1).5 However, this continued increase in income was not shared equally across demographic groups. Across the percentiles of income distribution, the changes in median income were 2 percent or less.6 This is in stark contrast to the substantial gains in median income that occurred over the 1998–2001 period, when median income “had risen 10 percent or more for most groups.”

The authors also note that “across education groups, median incomes rose only for families headed by persons with less than a high school diploma and for families headed by persons with a college degree; growth was particularly strong for the former group — 7.2 percent — but that group still has the lowest median income of all education groups.”7 In contrast, the data show that during the preceding three-year period, median incomes had increased for all education groups except those in the less-than-a-high-school-diploma group, while the group with college degrees experienced a substantial increase in median income.

Among ethnic and racial groups, the authors observe that the median income of nonwhite or Hispanic families increased 8.8 percent between 2001 and 2004, while the median for white non-Hispanic families rose only 2.5 percent. However, the situation was quite different between 1998 and 2001. During that period, “the median income of nonwhite or Hispanic families had been about unchanged, while the median had increased 9.0 percent for other families.”8

Net Worth. The median real net worth (wealth) for all families rose 1.5 percent from 2001 to 2004 (Figure 2).9 This is strikingly different from the 10.3 percent rise that occurred between 1998 and 2001. As with changes in income, changes in net worth varied across demographic groups. Median net worth by age group resembled a “hump” pattern, with the highest level in the 55 to 64 age group. The authors suggest that this pattern stems from “both life-cycle saving behavior and growth in real wages over time.” This same age group also saw the largest gain in median net worth during the previous three-year period.

Change in Median Income and Median Net Worth: 1995-2004 SCF

The SCF showed that real median net worth rose for both white non-Hispanic and nonwhite or Hispanic families in the 2001–04 period. Even though nonwhite or Hispanic families had the largest increase (29.8 percent compared with 8.6 percent for white non-Hispanic families) during this period, this group’s absolute level of wealth pales in comparison to other families. In fact, “in 2004, the median wealth of nonwhite or Hispanic families was only 17.6 percent of that for other families.”10

Assets. The proportion of families that held any type of asset rose 1.2 percentage points in 2004. Within the various demographic groups, those who experienced the largest increases in the proportion of families with assets were “the lowest quintile of the income distribution, families headed by persons aged less than 35 and by those aged 65 or older, nonwhite or Hispanic families, families with a head who was not working, renters, and families in the bottom quartile of the wealth distribution.”

However, the SCF revealed a 6.3-percentage-point decrease in financial assets as a share of total assets from 2001 to 2004.11,12 Perhaps noteworthy in this regard was the decrease in the share of families that held stocks.13

The decline in the share of financial assets held by families was offset by an equal increase in nonfinancial assets. The authors indicate that this rise in the share of nonfinancial assets in families’ portfolios could be traced primarily to residential real estate. More specifically, it resulted from the rise in the homeownership rate of primary residences (up 1.4 percentage points) and other residential real estate holdings — second homes and investment properties (up 1.2 percentage points). This rise was further bolstered by the dramatic increase in the value of real estate in many areas.14

Debt. Another interesting finding was not only the changes in but also the nature of debt incurred by families between 2001 and 2004. According to the authors, “The share of families with any type of debt climbed 1.3 percentage points during 2001-04, to 76.4 percent” (see Table). This represents a 1-percentage-point rise over the preceding three years. The overall increase in families’ debt during the 2001–04 period was due primarily to the increase in loans secured by residential properties; these include first-lien mortgages and home equity lines of credit secured by primary residences as well as loans for other residential real estate.15 In general, according to the authors, “Over the 2001–04 period, the prevalence of borrowing declined for renters, the youngest age group, and the lowest quartile of the wealth distribution and increased or held about steady for the other groups.”

Also noteworthy was the value of debt held by families.16 From 2001 to 2004, the median value of total outstanding debt for families that had any debt rose 33.9 percent (from $41,300 to $55,300). This contrasts notably with the 9.5 percent rise in median debt from 1998 to 2001. Moreover, the authors observe that “across demographic groups, median debt tends to rise with income and wealth and to rise and then decline with age.” Over the 2001–04 period, a particularly striking increase occurred in the median debt of families headed by persons aged 65 or older.17 However, the median value of debt in this group remained much below the median for all families.

Several events that occurred over the 2001–04 period had a discernible impact on consumers’ home equity. The increase in property values of primary residences raised the amount of home equity available to families. The authors state that “median home equity among those with home-secured debt rose from $61,900 to $70,000 over the period, a 13.1 percent increase. They add that “by eliminating the deductibility of interest payments on most loans other than those on primary and secondary residences, the Tax Reform Act of 1986 created an incentive for homeowners with a need for additional liquid funds to borrow against their home equity.” Furthermore, low mortgage interest rates may have offered an additional incentive for homeowners to tap their home equity for home improvements and debt consolidation.

Since the increase in liabilities outstripped the increase in assets, “the ratio of the overall sum of family debts to the sum of their assets (the leverage ratio) rose 2.9 percentage points, from 12.1 percent to 15.0 percent.”18

Concluding Note

In analyzing the most recent triennial survey data (2001–2004) from the Survey of Consumer Finances, Bucks, Kennickell, and Moore find that real family income increased 1.6 percent, but the gains were mixed across demographic groups. These changes stand in contrast to the strong and broad gains realized between the 1998 and 2001 surveys. Similarly, net worth rose 1.5 percent over the 2001–04 period, with an uneven change among demographic groups. But the measured gains for the period pale in comparison with the 10.3 percent growth in wealth from 1998 to 2001.

In addition, during the 2001–2004 period, “asset ownership and debt use increased in both prevalence and amount.” A key factor for asset ownership was an increase in the ownership of real estate and its appreciation. Likewise, for debt use, “the most important factor in the increase was a rise in the amount of debt associated with residential real estate.”

Overall, the authors provide a broad perspective on the changes that occurred in the finances of U.S. families between 2001 and 2004. In many instances, they offer possible explanations for the findings, while others remain to be explained. They also provide a useful service to researchers by highlighting the array of statistics contained in the SCF and possible areas for further research.

  • 1 “Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances,” Federal Reserve Bulletin, 92 (February 2006), pp. A1-A38.
  • 2 The report contains a great deal of information; however, only selected results will be presented here. For information from the SCF on shifts in electronic means of payments, see Loretta J. Mester, “Changes in the Use of Electronic Means of Payment: 1995–2004,” Federal Reserve Bank of Philadelphia Business Review (Second Quarter 2006), pp. 26-30.
  • 3 Before 1992, the SCF was conducted by the Survey Research Center of the University of Michigan.
  • 4 The authors also noted that changes in tax policy had an effect on family finances. Federal tax cuts enacted in 2003 had a favorable impact on the child-care credit, married taxpayers, and those taxpayers in the lowest tax bracket.
  • 5 Although the authors state many of their findings in terms of changes in the mean and median values, only median changes will be reported here. The mean value of a set of numbers is the average value, and it is sensitive to extremely high or low values in the set. When the set of numbers is ordered from high to low, the median is the value above and below which there is an equal number of values.
  • 6 Any references to percentiles of income groups refer to the following categories: less than 20, 20-39.9, 40-59.9, 60-79.9, 80-89.9, and 90-100.
  • 7 The educational categories are Less than a High School Diploma, High School Diploma, Some College, and a College Degree.
  • 8 Substantial changes also took place across almost all age groups between 2001 and 2004. The authors note that while median incomes dropped for the groups under age 45 (namely, less than 35 and 35-44), they rose strongly for the other age groups (45-54, 55-64, and 65-74) except the 75 or older group: “Over the preceding three-year period, median income had increased for most age groups, particularly for the oldest.”
  • 9 The authors define net worth as the families’ gross assets minus their liabilities.
  • 10 In addition, over the 2001–04 period, median net worth rose in all income groups above the 40th percentile, with the 80-89.9 percentile group registering the largest increase, 11 percent. The preceding three years differed somewhat in that the median net worth increased in all income groups, and the largest increase was in the 90-100 percentile group.
  • 11 Financial assets include transaction accounts, certificates of deposit, bonds, stocks, retirement accounts, pooled investment funds, cash value life insurance, and other managed assets. Nonfinancial assets consist of vehicles, primary residence, other residential property, equity in nonresidential property, business equity, and other assets (such as artwork, jewelry, and antiques).
  • 12 Although 91.3 percent of families in 2004 had some form of transaction account (checking, savings, or money market account), the share of those with a checking account rose, while the share of those with other types of transaction accounts fell.
  • 13 The stocks referred to here could have been held either directly or indirectly through a retirement plan or other managed asset account.
  • 14 Overall, the median value of primary residences rose 22.1 percent, while the median value of other residential real estate rose 17.4 percent.
  • 15 Families’ credit card balances are also noteworthy. The authors state that “from 2001 to 2004, the proportion of families carrying a balance rose 1.8 percentage points, to 46.2 percent.” This “recent increase was shared by most demographic groups; the proportion carrying a balance declined for the lowest two income groups, the lowest wealth group, the youngest age group, nonwhite or Hispanic families, and renters.”
  • 16 For more on the amount of debt held by families, see Federal Reserve Bulletin, Tables 11A and 11B, pp. A27 and A29.
  • 17 The median value of debt for families headed by persons 65 to 74 rose from $14,000 to $25,000, while the median debt for families headed by those 75 or older increased from $5,300 to $15,400.
  • 18 The SCF data also reveal that during the 2001–04 period, there was an increase in the “proportion of families that had been delinquent with their payments in the year preceding the survey and in the median ratio of loan payments to family income.”

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