The Middle Class & Poor Haven’t Recovered From The Financial Crisis

The Poor Have A Negative Net Worth

In a previous article we discussed how populism could rise in 2017. If you’re career is going well, you might be detached from the plight of some in the lower class. The charts below help you understand their recent woes. It shows the changes in net worth in each quintile. As you can see, those in the 25thpercentile have barely seen any gains since the financial crisis. This is because they don’t own stocks and they haven’t seen much real wage growth. Some in this group lost their house during the financial crisis and never recovered. Their net worth is only $10,000. Median households have recovered slightly from the downturn, but are nowhere near what they were at in 2007. Since the median income of households is $59,039, this means they have less than 2 years of income in savings and investments. Even the 75th percentile hasn’t recovered fully from the great recession. Only those in the 85thpercentile or higher have recovered from the recession. I think this is great evidence for why the 2008 recession will stand as the worst recession for decades. A house is the most valuable asset people have. It’s almost impossible for those with median incomes or below to recover financially after getting kicked out of their house.

Since this recovery has been based on increasing financial assets, specifically in the stock market, if the next recession hurts stocks the most and real assets the least, it might mean middle and lower class people won’t get hit too hard. The best comparison to this scenario is the 2001 recession. Even though tech stocks crashed, the rich did well. The 2001 recession didn’t have much of an impact on any households’ net worth because it was shallow.

Lowering Lending Standards

To provide a counterpoint to my statement that the next recession won’t be as bad for the middle class and the working poor as the previous one, we have the chart below which shows the lending standards for FHA loans have been declining. As you can see, the FICO score for loans supported by the government, which allow for 3.5% down payments, have been declining in the past 2 years. Both the median and average FICO score have fallen. A FICO score between 680 and 699 is considered good credit. A FICO score between 620 and 679 is reasonable credit. That means these loans are falling from good credit to reasonable credit. The lower the credit score, the high default rates on houses in the next recession.

Homeownership Rate Disaster

The one positive, if you can call it that, is the homeownership rate has fallen so much, there are less people in houses which can lose them. The homeownership rate hasn’t recovered since the financial crisis. It is near multi-decade lows. It is currently at 63.9% after bottoming at 62.9% in 2016. It would be scary if the rate fell significantly in the next recession as the lowest rate since 1965 was 62.9% in 1965. A rate below 60% turns the economy into one of renters. Renters have a tough time after retirement as their living expenses are still high.

The chart below meshes the two points we’ve discussed: lower household net worth groups haven’t recovered from the financial crisis and the homeownership rate has declined. As you can see, the homeownership rate of households in the 25th percentile and below hasn’t recovered from the financial crisis. Neither have those in the 25th to 49th percentile. Poor and middle class people wouldn’t care if the rich were seeing gains along with them, but once you take away their houses, they are prone to vote for populist candidates which could have volatile policies. While the next recession might not be as bad as the previous one, it’s the equivalent of kicking someone when they are down because most in the bottom half of net worth haven’t recovered. This hasn’t been an expansion for them because they don’t own stocks. The stock ownership rate fell from 62% to 54% because of the financial crisis.

The Risks In 2018- Brexit

We left off at the 20th risk which is the Brexit. The Brexit is still a messy process even though the vote was a year and a half ago. The latest news surrounding this is Prime Minister Theresa May will leave the Brexit deadline, which is March 2019, in place, but gives the conservative MPs the power to change the policy if the EU27 can agree on a pathway forward.

There are 4 options for the Brexit. The first is to stay in the single market and customs union. This would allow for free trade as the tariffs, rules, and regulations would be agreed on. The promise to take control of the U.K.’s laws, borders, and money would be fulfilled. This option is only possible with a 2nd vote which reverses Brexit, meaning it’s unlikely.

The 2nd option is the Norway model. That is the same free market approach which also pays fees to Brussels, but it means the U.K won’t be in the customs union. This let’s Britain make its own trade deals while it must listen to the EU regulations. The alternative to this is the Norway minus option which has the same policies, but also ends the free movement of people.

The third option is the Canada deal which would further distance Britain from the EU. It would allow the country to set its own rules and make new trade deals. This deal would result in low or no tariffs, but would cause border checks which limit free trade. This is considered the most likely option.

The final option is no trade deal. This would be bad for Britain’s economy as tariffs would be high and there would be long lines at the border. Britain would need to quickly make bilateral trade agreements with each nation it does business with. Britain might need to lower taxes and cut regulations to maintain global competitiveness.

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