Planner’s dilemma: the housing crisis and loss of net worth

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.