The Dynamics of Household Financial Fragility: Natural Disasters and Asymmetric Regime Transitions

We develop a dynamic approach to household financial fragility, conceptualized as an unobserved latent state spanning objective precautionary liquidity and subjective appraisals of solvency and borrowing capacity. Using five waves (2021-2025) of the Federal Reserve's SHED and estimating a latent Markov model, we identify three fragility regimes — Secure, Coping, and Fragile—and trace transitions following natural disaster exposure. Disaster exposure exhibits an asymmetric relationship with financial deterioration: higher odds of downward transitions — Secure to Coping and Coping to Fragile — but no statistically detectable association with upward transitions. We find no evidence that race or gender moderates these dynamics, but age does. Relative to prime-age adults, younger adults show a bifurcated response: disaster exposure is linked to higher odds of both climbing to Secure and falling to Fragile from Coping. Older adults, by contrast, have elevated odds of falling from Coping to Fragile, without evidence of an offsetting recovery. Our framework highlights state-dependent, asymmetric transition dynamics and persistent financial scarring that remain invisible to conventional analyses.