A study finds escaping your income bracket no longer means building wealth. That disconnect may be what's driving consumer pessimism to record highs

Historically, hard work was synonymous with the pursuit of the American Dream. However, recent findings indicate that the financial backgrounds of one's parents are now more significant than personal income in determining financial success.

It is quite common to observe individuals from affluent families, such as celebrities or influential figures, reaping the benefits of their parents' wealth and connections. The term "nepo baby" has become popular to describe such advantages; however, this phenomenon extends beyond Hollywood, affecting the lives of many ordinary Americans.

The evidence increasingly suggests that parental influence is a more accurate predictor of an individual's wealth than professional achievements.

A recent working paper from the National Bureau of Economic Research highlights a growing disconnect between personal income and wealth accumulation. For many years, the foundation of the American Dream relied on the belief that diligent work and a reasonable income would result in homeownership. Yet the study reveals that high earnings no longer guarantee wealth creation; rather, familial assets play a more critical role.

Max Risch, one of the study's co-authors and an assistant professor at Carnegie Mellon University, explained to Fortune: "Those that come from wealthier families that are maybe able to achieve those other economic goals—wealth building, homeownership—I think also could play into a sentiment of a sort of unfairness in the economy."

Despite reaching record highs in the stock market, Americans' perceptions of the economy remain bleak. An April Ipsos poll indicated that 61% of Americans believe the economy is heading in the wrong direction. Additionally, the May consumer sentiment index registered its lowest levels since the University of Michigan began monitoring this metric in 1952, lower even than during the COVID pandemic and the aftermath of the Great Recession. This decline in sentiment could stem from workers securing jobs that, while steady, fail to pave the way for wealth accumulation.

The lasting significance of the 'Bank of Mom and Dad'

Researchers examined a dataset comprising 3.4 million families and their wealth and income information spanning multiple generations to analyze monetary mobility across geography and generations. Risch noted that one of the most surprising outcomes was that personal earnings could only account for approximately half of the intergenerational inequality observed in housing ownership.

The findings indicate that children from affluent parents have a significantly higher probability of homeownership, even if their incomes are similar to those of children from less wealthy families. While various pathways exist for wealth accumulation, Risch highlighted that nearly all wealth for the bottom 95% of earners is linked to housing and retirement funds.

"It’s very consistent with the parents being able to help overcome these financial barriers," Risch said, "maybe through direct asset transfers, co-signing a loan, putting a down payment."

This aligns with insights from a recent Northwestern Mutual report, which found that an increasing number of parents are either assisting or contemplating assistance for their children in securing a home. Moreover, this study indicated that some parents are now prioritizing saving for their children's down payments over funding college education.

Homeownership as an elusive aspiration

Higher income levels alone are proving insufficient. A recent report from Harvard's Joint Center for Housing Studies revealed that home prices have surged to five times the national median income, reaching near historic highs. In certain metropolitan areas like Los Angeles and San Francisco, home prices soar to over 10 times the median income.

Risch reflects on California as a case study. The state boasts high upward mobility of income, presenting significant opportunities for workers to advance tax brackets due to its job market. However, the research also found that California ranks poorly in terms of upward mobility for homeownership. Despite holding well-paying jobs, many are effectively excluded from homeownership opportunities unless they come from wealthy families. Similar challenges are observed in other major urban areas such as New York, Chicago, and Houston.

These stark geographical disparities underscore the considerations families must assess when planning for their children's financial futures, as Risch points out: "There are these sort of tradeoffs that families have to make either when they're thinking about where to live, when they're thinking about how to set up their children for economic success."