For most estate planners, the best time to approach potential clients is when they are fairly young and still getting established in their careers. The idea is to get to them before any other financial advisors have made inroads with them, and while they have a long and fruitful future ahead of them.
The problem is that this cohort’s wealth levels have suffered terribly since the recession. The St. Louis branch of the Federal Reserve has taken a deep look at wealth by age, and found there is an enormous gulf between the assets held by families headed by people under 40 and those held by families headed by people over 40. And the key culprit is the housing crisis.
The Fed examined homeownership rates for different age cohorts before and after the recession. Despite the efforts of the government to promote an “ownership society,” homeownership rates (especially among young families) have declined seriously in recent years.
Overall, the percentage of families owning homes has fallen to 65.1 percent in 2013 from a peak of 69.0 percent in 2004. But for young families, the decline has been much more precipitous, falling to 42.2 percent in 2013 from 50.1 percent in 2005.
The value of their home constitutes the largest asset for most families, and this is doubly true for young families. As a result, there is now a wide chasm between the wealth claimed by younger families versus those of older, more established people.
The Fed’s research found that the average wealth of a young family headed by a person under 40 was roughly $108,000 as of the third quarter of 2013. Meanwhile, the average real wealth of a family headed by a person between 40 and 61 was $691,000. And the wealth of a family headed by someone 62 or older was $928,000.
Obviously, older people have had more time to amass assets, but the Fed determined that the housing crisis was perhaps the key variable in the wealth differences. The Great Recession fell disproportionately on young homeowners, who were more likely to lose a home to foreclosure. Many of these individuals were also forced to delay the purchase of their first home because of the sluggish economy and high unemployment rates during the recession. The effects of these losses of equity are very different depending on what part of the country we’re talking about. The areas of the country with higher home prices and higher volatility, surprisingly enough, show less of an effect on young families.
The reason is that since house prices bottomed out and started to rebound around 2011, they have come back much more strongly in places with high real estate values like California than they have in places with lower-priced housing markets, like Mississippi. So those families in California that were able to jump on the homeownership train as the recession was ebbing have been able to build up equity in a way that their compatriots in Mississippi have not.
The question now is how long this disparity in income will persist. Will the younger generation forever lag its older cohort in assets? The Fed researchers don’t seem optimistic. “A broad-based housing recovery will be necessary to restore the wealth lost by the typical home-owning family because homeownership, unlike stock-market investment, typically is a non-wealthy family’s largest investment,” they wrote in a 2013 study. “The recent recovery in house prices and homeowners’ equity therefore is good news, but much more will be needed for the typical homeowner to recover fully from the deep wealth losses experienced in recent years.”
These are important issues for planners to grapple with, particularly those seeking high-net-worth clients. A robust housing-market recovery might be a necessary to fuel the kind of affluent community that estate planners thrive on. Anything less will make building a successful practice all the more challenging.