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cepr.gifThe crash of the housing bubble is likely to eliminate most, if not all, of the gains that US families made in accumulating wealth over the last two decades, according to new projections from the Center for Economic and Policy Research.

The median family in the cohorts from age 35-44 is actually projected to have less wealth in 2009 than their counterpart in this age group in 1989.

The median family in the cohort from ages 45-54 is projected to have just 0.8 percent more wealth in 2009 than the median family in this age cohort in 1989.

The projections are based on the assumption that housing prices will decline by an additional 10 percent from March 2008 to March 2009.

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In percentage terms, the sharpest falloffs are projected to occur for the youngest families. The median family in the age cohort from 18-34 will have 67.6 percent less in net worth in 2009 than in 2004. The median family in the 35-44 age cohort will have 56.2 percent less in 2009 than in 2004.

The typical family in the age cohort from 45 to 54 will have 34.6 percent less in 2009 than did families in the same age group in 2004.

The CEPR says the sharp plunge in wealth projected for 2009 for families in each age cohort should point out the dangers of allowing financial bubbles, and especially a housing bubble, to grow unchecked. “Families will behave as though the bubble-generated wealth is real and adjust their consumption and savings behavior accordingly. As a result, tens of millions of families are likely to make wrong decisions, saving far less than they would have if they recognized the transitory nature of the bubble wealth.”

Inadequate saving is likely to be an especially serious problem for workers who are approaching retirement, the CEPR says. “Many retirees will find themselves far more dependent on Social Security and Medicare than would have been the case if their savings behavior had not been affected by the stock and housing bubbles.”

The financial situation of older workers must be an important factor in any plans to reduce the benefits provided by these programs.

Source: Burst Housing Bubble Eliminating Two Decades of Wealth