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Needed in 2015: Middle-class wealth gains

Rick Newman
Senior Columnist
Needed in 2015: Middle-class wealth gains

If the economy really bounces back next year, we’ll know because ordinary people will feel it—for the first time in years.

So far, we’ve had a five-and-a-half-year recovery that has mainly benefited the wealthy, while the middle class waits for relief to trickle down. The latest evidence of this hardening economic segregation is a Pew Research study showing the wealth gap between the rich and the rest hit the widest levels on record in 2013, the last year for which data is available. The gap probably widened further in 2014, since the stock market performed well—benefiting those lucky enough to have such investments—while housing sputtered and the typical family struggled just to keep up with inflation.

Pew found that upper-income families had a median net worth of $639,400, compared with $96,500 for a middle-income family. That’s a ratio of 6.6 to 1. In 2010, the ratio was 6.2, and back in 1983 it was a mere 3.4. Those numbers are consistent with worsening income inequality and middle-class living standards that have been stagnant fore more than a decade.

This chart shows how wealth has changed for lower, middle and upper-income families during the last three decades:

Source: Pew Research Center

The numbers show a big drop in wealth for all family types since 2007, which was near the peak of the housing bubble and a top in the stock market as well. But the financial pain is concentrated at the lower end of the income spectrum. Lower-income families have lost 48% of their wealth since then, while middle-income families have lost 40% and the wealthy are down just 11%. And upper-income families have enjoyed a big rebound in wealth since 2010. Other income groups haven't.

Some of that lost wealth is a sharp drop in real estate values. Home prices peaked in the summer of 2006 and are still about 9% below those levels, according to the Case-Shiller national home-price index. The home ownership rate has fallen too, with foreclosures and affordability problems turning many once or future home owners into indefinite renters. Since middle-class families typically have a higher percentage of their wealth invested in a home than in financial assets, the slow crawl back to a normal housing market hurts them more than the wealthy. Many families also had to draw down savings during the 2007-2009 recession, to help cover a spate of unemployment or pay down debt as credit standards tightened.

Workers have also had a difficult time replacing lost wealth. Income gains have been absent for many families, with median household income, adjusted for inflation, still about 5% below 2007 levels, according to Sentier Research. The latest government data show that incomes are just beginning to inch up, with average weekly earnings up 2.4% during the last 12 months. That’s slightly better than inflation. Woohoo.

If there’s any good news in the Pew analysis, it’s that wealth gains extend beyond the top 1% of earners, or the super-rich. Pew defined upper-income in a way that includes the top 21% of families, starting at an income of $114,300 for a family of three. In higher-cost cities on the east and west coast, that income threshold equates to fairly modest living standards, which suggest that some people who at least consider themselves middle class are participating in the wealth recovery. Now, we need it to stretch further down the income scale.

There seems to be a good chance middle-income families will finally start to make up lost ground in 2015. The labor market has improved enough—with employers creating 2.7 million new jobs during the last 12 months—that labor scarcities in some areas ought to start pushing pay up. Gains won’t happen everywhere, but workers with the skills employers need ought to start getting decent raises.

The housing market also seems poised for improvement, even as 2014 ends with disappointment. Home price gains have dwindled from double to single digits this year, and existing home sales for November fell by more than economists expected. That could signal a rebound coming in 2015, however. Interest rates have drifted back near record lows, and banks are finally (if slowly) easing lending standards. That’s drawing more first-time buyers into the market. “The fundamental drivers of housing demand are starting to kick into high gear,” Moody’s Analytics predicts.

One other friendly trend is the sharp drop in gas prices, which Citigroup estimates will save the typical family $1,150 per year if oil prices stay around $60 per barrel. That won’t be a big addition to wealth, but it will add some breathing room to the family budget and make people feel cheerier. If the good feelings last, happy days might be around the corner--or maybe the next corner after that.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.