Financially, You're Back to 1992 (but It's Not As Bad As It Sounds)

1992 Economy
1992 Economy

It's official. Money-wise, you're right back where you were 20 years ago.

Last week, the Federal Reserve published its latest report: "Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances." But if the title alone is enough to start you yawning, stifle the urge for a moment. There are some interesting details in here.

For example, between 2007 and 2010 -- from Housing Bubble high to "We're out of recession" low -- the median net worth of U.S. households fell 39%. And post-plunge, your average U.S. family is now "worth" something on the order of $77,000, or roughly the same as it was back in 1992.

Rip Van Winkle's Worst Nightmare

Yes, you read that right. Two decades. Twenty years. Zero improvement in your family's fortunes. Tally up the value of your house, your 401(k), and your bank account, subtract your debt, and chances are you're right back where you started 20 years ago.

Nor do prospects look good for "making up the difference." Between 2007 and 2010, median family income in the U.S. declined by nearly 8%. (If you're curious to learn whether you're keeping up with the Joneses... they're making about $45,800 per year.) Meanwhile, stock-market-based retirement accounts are said to have fallen 7%.

Sounds Bad ... But Not That Bad, Right?

Salaries down 8% and 401(k) accounts that are 7% smaller isn't exactly good news, but those hardly sound like end-of-the-world numbers.

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So where the heck did the headline-grabbing "39%" decline in net worth come from?

Anyone who's lived in America these past few years can probably guess at the answer: home values.

The real import of the Fed's report isn't that things have become universally bad in America, but that one particular factor in Americans' net worth took a particularly brutal beating when the housing bubble burst. With home values falling but homeowners' debt on their mortgages remaining basically unchanged, median home equity during the three years covered by this survey fell 42%, to about $55,000.

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Aside From That, Mrs. Lincoln, How Was the Play?

Again, this is pretty bad news. But there was good news, too.

For example, by 2010, more than 25% of U.S. families were carrying essentially no debt -- a higher number than three years earlier. In particular, consumers have cut back on credit card debt, with 60% of U.S. households reporting that they pay off their credit cards in full, every month -- a 6.7 percentage point improvement over 2007. And even families that still do have credit card debt have less of it. Median credit card balances declined 16% to about $2,600.

As for mortgage debt, there's good news to report here, too. From September 2007 to September 2010, interest rates for a 30-year fixed mortgage dropped by more than 2 full percentage points to 4.35% (and are still dropping). So for those homeowners with the ability to refinance, debt has become less of a burden.

The End of Irrational Exuberance

Of course, cutting debt is just one step toward getting a family's finances in order. The other part is saving.

With 4.4% fewer households saying they were able to add to their savings in 2010 than in 2007, the Fed's report makes it clear that saving is getting harder. And that's not surprising. Overall incomes are down modestly, although median incomes among the poorest quintile of American families actually rose -- up about 4% to $13,400 annually.

%Gallery-149494%But when people do get a chance to save, they're saving more carefully. The Fed survey shows a 3 percentage point increase in the value of households' retirement accounts between 2007 and 2010 -- a trend that's continued uninterrupted since at least 2001. Allocations of saving to steadier-paying bonds and to "liquid" checking and savings accounts are also up. Meanwhile, consumers are paring their exposure to volatile common stocks. The percentage of family financial assets invested in stocks dropped 3.8 percentage points between 2007 and 2010, and stock investments are down by fully one-third since 2001.

For anyone who's wondered why the stock market has been looking so anemic lately, this last point may be the most revealing of all.

With money flowing out of stock funds, and into cash and bonds, it's only natural that share prices would stagnate. Economics 101, after all, teaches us that lower demand leads to lower prices. The good news, though, is that if and when money starts flowing back into stocks at more historically normal rates, we could see a new stock market rally.

And this time, one better grounded in lower debt levels, and solid savings accounts to support it.