Thursday, June 11, 2009

Households' balance sheet update


The Fed today released its always-fascinating look at the state of household finances, which is summarized in this chart. Some quick observations of mine:

Even though the S&P 500 fell 12% in the first quarter, household net worth fell by only 2.5%, thanks in part to an increase in Treasury bond holdings and a reduction in liabilities, which is indicative of a higher savings rate.

The big drop in net worth since 2007 (-$12 trillion)was due mainly to the decline in the equity market (-$10 trillion), and secondarily to the decline in housing prices (-$3 trillion).

With the stock market up almost 20% so far this quarter, net worth is likely up significantly, even after assuming a continuing decline in housing prices.

Even after all the destruction in financial and real estate holdings the in the past year or so, household net worth was still almost 20% higher ($8 trillion higher) at the end of the first quarter than it was at the end of 1999, at about the time the economy and the markets peaked.

The ratio of household liabilities to disposable personal income has fallen by 8% since 2007. Households are deleveraging, and they will probably continue to do so, since homeowners' equity as a percentage of household real estate has fallen from 58.5% in 2005 to 41.4%.

Increased savings, however, does not mean a shrinking economy. Money saved by one person must necessarily be spent by another.

14 comments:

Mark A. Sadowski said...

Scott,
Your chart implies that the rate of decline has decreased in 2009. This is deceptive since it is only the first quarter and does not consider the remaining three. The current bear market rally has peaked and the real estate crash is picking up speed again because of soaring mortgage rates. I project that by the end of the year all of the gains in aggregate household wealth accrued since 1999 will be gone.

P.S. An average per year increase in aggregate wealth of 1.8% since 1999 is pathetique especially when considered on a per capita basis (then it comes out to about 0.7%).

vincent said...

in post WWII we have rarely had a YOY decline in HH net worth - only a nominal decline during 2000-2002 tech bust but that's it, not during the 65-80 bear market or 87 crash - the recent peak to trough decline is a ~20%
ie the only other time we had YOY loss in net worth the peak to trough decline was a total of $1.5t dollars between 2000-2002
this cycle we have seen over $10t since the 2007 all time peak

an unprecedented event just when baby boomers need to retire

if the only way to replace the net worth is to re-inflate the asset side then we have a problem brewing

Scott, agree? how do you reconcile that kind of outlier at such a critical time?

Jeff said...

Savings do lead to a slowing in the economy - while it's true there are always 2 sides to a transaction and money saved by one was spent by another, it does indicate a slowing in the velocity of money. Fewer transactions is less economic activity.

That said, the increased saving (and decreased indebtedness) are fantastic for the economy long-term. I welcome all the short term pain for our economy's long term gain. Now if only we could get the government to stop leveraging our future while consumers finally start saving for it...

alstry said...

Scott,

Do you live in Fantasy Land???

Commercial Real Estate around the country is off 50% or MORE from peak in 2007.

AIG Building just sold for under 10 cents on the dollar, Hartford Bldg just sold for half of what it did a couple years ago, we now have ghost malls sprouting up across the nation, and raw land is basically free.

15% reduction in home prices since 2007??? You live in CA, you should know better....and the same is true for AZ, FL, NV and just about every other place where a bunch of new homes were built in the past five years. 50% off 2007 peak is common and 30% is routine. In a number of areas, homes are 75% off and more as foreclosures are now exceeding 300,000 per month.

Let's not forget dimunation in pension values that are still not accounted for....yet!!!! Things could get really interesting in CA soon.

Anybody holding treasuries are getting killed now as well.

YUP, I guess we got the stock market......for now....but just wait until earnings become an issue again....S&P earnings are down only 90% from peak and we havn't even factored that tax receipts are down 40% and more in many cases.

In other words, if we doubled everyone's taxes, it still wouldn't make up the difference and the gap is getting wider.

You should not be surprised if the net worth of American's drops 50% in the next 12 months...maybe more as bankruptcies are approaching record highs and based on a few quick conversations with some HR buddies....you are about to see a new wave of layoffs reaching into the millions....once we factor government workers against a backdrop of record low hirings.

Chad said...

Mark Sadowski, since when have 5.75% mortgage rates been considered "soaring"? And who says the current rally in stocks is of the bear market variety?

Alstry, I don't even know where to begin. I'll pick on the easiest target...the "15% reduction in home prices since 2007."

Simply put, the data say no such thing. They merely state the overall value of all real estate at the time.

Yes, home values are falling in some areas, but they're actually rising in others. And, although it's being done at below-normal levels, more and more homes are being built every year.

So what we're losing in value in some areas, we're making up for in others both in rising prices AND more supply.

Also, you're willing to go on the record with, "...a new wave of layoffs reaching into the millions...based on a few quick conversations with some HR buddies," huh? Wow! NOW who's the one living in fantasy land?

alstry said...

sdas

alstry said...

Chad,

Right now we have 1 in 8 mortgages delinquent or in foreclosure, 300,000 foreclosures being filed per month, record low equity in homeownership, and the vast majority of states where homes are planted are seeing prices crashing.....my guess, to be conservative is for every $1 of home price rise, there is over $100 of price fall.

As far is millions of jobs lost.....there are over 21,000,000 government jobs at the Federal, State, and Local levels......and we have record deficits with record tax receipt declines....current data give a grim picture for future receipts.....so how many jobs do you think will be cut to adjust to the much smaller intake of receipts????

And that is just government alone....airlines are now cutting again...after cutting again and again without even factoring the wage cuts......American announced 1600 and Delta will announce soon. Each cut in an airline worker results in many more cuts in Hotels, Restaurants, and other travel related jobs. Travel is a trillion dollar industry.

And we havn't even started to address healthcare....I will let you think about that one for a while as it simply might be too much for one comment.

Gene Prescott said...

Scott,

Thanks for posting the HH balance sheet update. These snapshots at the specified dates, annually except 1st quarter of in progress 2009 are useful.

Mark's notion of showing the data on a per capita basis would be interesting.

Showing the full scale of 0 to 70 helps with visually communicating the change over time.

Scott Grannis said...

Mark: The chart clearly notes that data for 2009 is only through Q1, so I'm not being deceptive. But I supposed you haven't noticed that the stock market is up quite a bit since the end of March. Even if housing continues its decline, which I presume it will, the gains in stocks are much bigger; net worth will almost certainly rise in Q2 unless the market plunges in the next two weeks.

You say I'm deceptive, but you assume the market rally has peaked. How do you know that?

As for mortgage rates, I have posted plenty of charts that show that while rates are up from their all-time lows, they are still way below the average of recent years.

Your forecast for year end may well be right, but no one knows right now.

Scott Grannis said...

vincent: the point you make is that equity valuations are unbelievably low, and I would agree. It's been awful for everyone. I think Obama's policies (which began with Bush's bailouts) are a big factor keeping things depressed. Regardless, there are a number of ways we can come out of this, with inflation being one (and that being the least desirable).

The best way to come out of this would be to follow responsible fiscal policies and maintain a strong dollar policy. Corporate profits are strong enough still to justify a huge increase in equity prices.

Scott Grannis said...

alstry: I explained in a previous post how S&P earnings are not down 90%, and that corporate profits today are almost double what they were in 1999. As for the other things you mention, the market is fully aware of them. They are priced in. The real estate declines seem small, I agree, which is why I assume those numbers will continue to go down. But equity gains are larger than potential housing losses. Prices are down 50% in some areas of LA, but that is not true of the average house in the country.

Public Library said...

The whole "green shoots" theory remains predicated on ignoring the $12T+ in Government guarantees and that the market has been able to re-price risk accurately with this unprecedented credit intermediation. The problem is we just went through decades of incorrectly allocating capital and pricing risk because of cheap money and lax regulation and now the Government through cheap money and lax oversight is involved in pricing ALL of that same risk.

We may re-flate for a short period but it will end in tears again. Cheap money and lax regulation lead to corruption and bubbles. Does anyone see why things are different from 2, 5, or 15 years ago? Americans can save all they want but with the government spending every penny of it and more, while offering money for nothing to banks, do not expect the allocation of capital to reflect anything near an efficient market.

Enormous debts and governmental corporations are here to stay. Get used to it and factor in governmental intermediation into your analysis of every market in the United States. You cannot sit here and complain about the inefficiencies of government when it come to Universal Health Care yet ignore the 4,000% increase in credit intermediation by the Fed. They are just as inefficient as Congress and have entered into a trade with no exit strategy. That should scare the daylights out of everyone.

Scott Grannis said...

Public: I disagree, even though I acknowledge that what the Fed is doing could create a lot of inflation, and that would have lots of unpleasant consequences.

First, the $12 trillion of guarantees is wildly inflated. When you boil it all down, the Fed has purchased about $670 bil. of securities since this crisis started: $427 bil. of MBS, $86 bil. of agency debt, and $158 bi. of CP. It has loaned out about $640 bil. It has actually reduced its holdings of Treasury bonds by $162 bil. Net additions: $1.15 trillion.

The government has been effectively guaranteeing FNMA and FHLMC securities for a long time.

The government has taken on several trillion of risky securities, but that is a drop in the global bond bucket.

Corporate bond yields have fallen significantly, and corporations have sold hundreds of billions of new bonds this year, confirming that their prices are not out of touch with reality. Swap spreads are almost back to normal levels and lots of transactions are taking place. Confidence and liquidity have returned. We are not living in some fantasyland where prices are trading at ridiculous levels.

Yes, the federal fiscal situation looks untenable in the long run. But we are not without solutions. Already we are seeing that cap and trade, universal healthcare are running into problems. Obama's popularity is declining. The scandals are emerging, and there will be lots of them one the $800 billion of stimulus is spent. I predict big changes in the future for the better.

Public Library said...

I hope you are right ;)