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Financial State of Americans: Too Much Debt

Apr 17, 2006  •  Post A Comment

By Bradley Johnson

Advertising Age



It’s the day of reckoning for taxpayers and not a bad time to assess the state of finances for the average American family. How are consumers doing? It’s a mixed picture.

Consumer income has barely budged in this economic recovery, and savings have dwindled. Home ownership has soared along with housing prices, but so has debt.

The average family isn’t getting rich: Median net worth (assets minus debt) from the recession year of 2001 through 2004 rose just 1.5 percent to $93,100, according to the Federal Reserve Board’s comprehensive new Survey of Consumer Finances.



Saving and Spending

But a review of personal-finance findings from the Fed and other sources also shows that consumers are investing in their future. Half of U.S. households own stock; seven in 10 families own their home. Following is a look at the state of consumer finance.

Americans officially have been living beyond their income for one year. The nation’s personal-saving rate-income minus consumption and interest payments-turned negative in April 2005 for the first time since 1933, according to the Bureau of Economic Analysis.

The Fed survey found 56 percent of families are setting aside savings. It also asked consumers how long they typically plan for key saving and buying decisions. The richer households are, the longer the planning period. Families in the bottom 50 percentiles of wealth live in the short term: 45 percent of those families plan key money decisions a few months to a year out. Among the top 10 percentiles, more than 60 percent plan saving and consumption decisions at least five years out.



House Money

Consumers can live beyond their income for a time by drawing on savings and capital gains and by borrowing. Many are extracting cash from the house, taking out gains after a sale or borrowing on equity.

A cooling housing market means less easy money. One indicator of a peak: Census Bureau data show the percentage of households that owned homes reached an all-time record of 69.2 percent in late 2004.

The decline since then has been small; 69 percent of families owned a home in late 2005. But lack of growth (after 10 consecutive years of growth) suggests a limit to the percentage of households that want to or can buy a home at current prices.



Debt

Just under half of households (48 percent) had a home loan in 2004; 46 percent owed on credit cards or on installment loans such as car loans. About one-fourth of U.S. households (24 percent) were debt-free.



Stocks

In 1962 just 18 percent of families owned stock, according to the Fed. In 1983-21 years later-19 percent had stock or stock mutual funds. Advance 21 years to 2004, and half of households (49 percent) had money in the market. What happened?

A bull market, for one. The Dow added 300 points from 1962 to 1983-and 9,000 from 1983 to 2004.

The other key driver was the advent of employer-sponsored retirement plans such as 401(k)s. Nearly half of today’s investors began by buying stock funds through such plans.

Stock-market values halved from 2000 to 2002, but since have come roaring back. What’s remarkable is how inactive investors were during this roller coaster ride.

In 1998, on the way up, 42 percent of stock or fund investors bought or sold shares, according to the Investment Company Institute and Securities Industry Association. In 2001, on the way down, and in 2004, on the way back up,

40 percent did some buying or selling.