Thursday, September 18, 2014

Solid gains in net worth

U.S. households continued to enjoy strong gains in net worth in the second quarter of this year, according to just-released data by the Federal Reserve. Thanks mainly to gains in financial assets, net worth rose to a new high in nominal and real terms; on a real per capita basis, net worth is within inches of an all-time high. In the 12 months ending June, 2014, household net worth increased by 10%, or almost $8 trillion. (For purposes of comparison, consider that the market cap of global equities rose by over $11 trillion in the same period.)

Household debt totaled just under $14 trillion in the second quarter, for a net increase of zero over the past 7 years; in real terms that represents a reduction of over 10%, and that counts as some serious deleveraging. The ratio of household debt to net worth has now fallen from a high of 25% in the first quarter of 2008 to 17%—a reduction in leverage of about one-third.

Since their recession lows, real estate valuations have increased by about $2.2 trillion, while the value of financial asset holdings have increased by more than $21 trillion.

Real household net worth now stands at a new high, and is on track with its long-term annualized growth rate of 3.6%. 

On a real, per capita basis, net worth in the second quarter was slightly less than its pre-recession high. Annualized gains over the long haul have been 2.4%, reflecting population growth of a little more than 1% a year. The average family of four now has a net worth of just over $1 million.

A few trillion here, a few trillion there, and you have the makings of some serious gains in prosperity. Since 1950, real per capita net worth has more than quadrupled, and new highs are just about inevitable.

Does it matter that the rich control a disproportionate share of total net worth? Not as much as you might think. The vast bulk of the wealth of the rich is tied up in real estate (mostly commercial) and ownership stakes in successful businesses. Those holdings are valuable only because they provide much-needed and much-desired goods and services to all of us. Without their wealth we would all be much less prosperous.


jeff said...

Thanks for the response in the last entry. If I understand this, then the "real yield" of a TIP, is effectively the calculated yield to maturity (YTM) of the TIP (or the nominal bonds YTM minus the expected inflation rate).

And the real yield is the market's imperfect measure of the future expectations of economic growth above the future expectations of inflation. Negative real yields indicate the market expects inflation to be higher then growth in the future. Large positive real yield indicate deflationary expectations. Small positive yields suggest disinflationry expectations. Of course the market can be "irrational" at times.

Benjamin Cole said...

I like prosperity! Bring on more of it!

I know Scott Grannis is right on the numbers, but they are surprising. I would have expected net worth from gains in real estate to be about as large as gains from financial assets.

Really? Households have gained $12 trillion from financial assets and just $2 trillion from real estate since recession lows?

But Scott says the rich have their wealth tied up in real estate. And many middle-class family own homes, their biggest asset.

By this measure, we have a boom in equities, but not real estate. No bubbles in real estate yet, I would guess.

But then, Eugene Fama says thank to EMT there is no such thing as a bubble.

I think Fama is right.

McKibbinUSA said...

I personally prefer to see a ratio of real property assets to financial assets -- is that a concern for anyone else?

Scott Grannis said...

The ratio of household real estate holdings to household financial assets has fallen significantly and is now about as low as it has ever been in the past 60 years.

Unknown said...

Take out the top ~1% maybe even the top .01% of households and the numbers change drastically.