It’s easy to look at the child of a celebrity or power couple and see the advantage that their family’s wealth, power, and connections have given them in a business or enterprise of their own. And it’s even easier to call him a “nepo baby” when he benefits from his parents’ money and influence. But the “nepo baby” trend could reach beyond Hollywood and into the lives of everyday Americans.
In other words, it’s increasingly evident that who your parents are has become a more reliable indicator of your wealth than what you actually do for a living.
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According to a new preliminary study from the National Bureau of Economic Research, there is a growing separation between income and wealth generation.
For decades, the American dream was based on the idea that hard work and a reasonable income would lead to home ownership.
But the research concludes that high income no longer directly correlates with wealth building. Today, it matters more what assets your family owns.
“Those who come from wealthier families may be better able to achieve other economic goals — building wealth, owning a home. I think this also contributes to a sense of economic injustice,” Max Risch, one of the study’s co-authors and an assistant professor at Carnegie Mellon University, told Fortune.
Even as Wall Street hits successive all-time highs, Americans are feeling increasingly worse about the economy.
An Ipsos poll conducted in April showed that 61% of Americans believe the economy is on the wrong track.
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Meanwhile, May’s consumer confidence index reached the lowest level since the University of Michigan began tracking the metric in 1952 — even below levels seen during the Covid pandemic and after the Great Recession.
And this may happen because, even when they obtain stable or well-paid jobs, workers are increasingly excluded from the possibility of acquiring assets that generate wealth.
The resilient value of the “Bank of Mom and Dad”
The researchers used a database with 3.4 million families and their income and wealth records over several generations to track how money moves geographically and between generations.
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One of the most surprising findings, according to Risch, was that income managed to explain only about half of the intergenerational inequality related to housing.
The data shows that, even with identical incomes, the child of wealthy parents is significantly more likely to own a home than someone without wealthy parents.
Of course, there are other ways for Americans to accumulate wealth besides home ownership. But Risch notes that for the bottom 95% of incomes, virtually all wealth is tied up in real estate and retirement.
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“This is very consistent with the idea that parents can help overcome these financial barriers,” Risch said, “perhaps through direct asset transfers, cosigning loans, or helping with a down payment.”
This coincides with the findings of a recent report from Northwestern Mutual. More parents are helping — or thinking about helping — their children to buy a property. The study also revealed that some parents are prioritizing saving for a down payment on a house over paying for college.
Owning your own home becomes an increasingly distant dream
Higher incomes are simply not enough anymore. A recent report from Harvard’s Joint Center for Housing Studies found that home prices have soared to five times the national median income, approaching historic highs.
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In some metropolitan areas, including Los Angeles and San Francisco, home prices exceed 10 times the median rent.
Risch uses the western US to illustrate why, even with a stable income today, it is more difficult to climb the wealth ladder.
The study concluded that California has some of the highest upward mobility in terms of income, which means there are many opportunities for workers to move up an income bracket or two thanks to the jobs offered in the state.
But it turns out that moving west in search of prosperity has its limits. The state is one of the worst in the country in upward mobility related to home ownership. Even with high-paying jobs, most remain excluded from the housing market in the Golden State — except those with wealthy parents.
Americans in other major urban centers face the same barriers to turning wages into assets, from New York to Chicago to Houston.
These striking geographic differences are something that, according to Risch, parents can take into consideration when thinking about their children’s future and well-being.
“There are these kinds of tradeoffs that families have to make when they think about where to live and how to prepare their children for economic success,” he said.
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