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Jun 24

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Why are the Fed’s net worth statistics so different?

There is still much talk in the media about the Federal Reserve’s recent statistics published in its Survey of Consumer Finances (SCF), namely that household median net worth fell by almost 40% from 2007 to 2010 and the mean fell almost 15%.  (See a recent blog post here that provides seemingly similar Fed data exhibiting different results.)   However, the media is not providing much, if any, insight into why these ominous statistics are so disparate – i. e., why is the median decrease of 40% is so much more than the mean (aka average) of 15%?

To understand the difference, a brief review of the difference between median and mean is in order (those that are scared of math, hang in there…this part will be short).  The mean (average) and median both measure the “typical” value of a data set (aka central tendency). They are calculated differently and the best measure depends upon the situation.  Conceptually, the main difference is that unlike the mean, the median is not influenced by outliers (extreme values that are atypical) in the data set.  Thus, the median is used more often when there are a few outliers that impact the mean so that it doesn’t present as accurate a representation of the underlying data (or what might be “typical”).

Based on the distinction described above, one should be able to quickly grasp what it means when the median and mean net worth decline are so different.   The Fed’s SCF disaggregates the net worth statistics into multiple income/net worth groups.  According to the Fed’s SCF,

Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. The exceptions to this pattern in the medians and means are seen in the highest 10 percent of the distributions of income and net worth, where changes in the median were relatively muted. Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices.   This collapse is reflected in the patterns of change in net worth across demographic groups to varying degrees, depending on the rate of homeownership and the proportion of assets invested in housing….

 

…Across net worth groups, the percentage changes in median assets and net worth were most similar for families in the highest or lowest quartiles of the distribution of net worth. For the wealthier groups, housing tends to be a smaller share of net worth, and it is less likely to be mortgages than is the case for the middle wealth groups. For the least wealthy group, homeownership is much less common than for other groups. The divergence between fluctuations in median asset change and median net worth change is largest for the middle two quartiles, whose net worth tends to be dominated by housing.

To be a representative sample, the Fed’s data includes extreme values (outliers) for a relatively small part of the population (the very rich and the very poor).  Thus, the better measure of the drop in “typical” net worth is the median rather than the mean.

About the author

Nicole Liska

I am a Principal at Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I hold an ABD and MA in economics from the University of California, San Diego. I perform damages analyses and serve as a damages expert witness. My resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/06/why-are-the-feds-net-worth-statistics-so-different/

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