Saturday, October 7, 2017

Healthy households

A few weeks ago, I had some charts (the last two in this post) that showed how our net worth as a country on a real and per capita basis has reached new all-time highs. Our collective prosperity rests on the value of our savings, our investments, and our capital stock. Regardless of who owns all that money (as of June 2017 the net worth of the private sector was over $96 trillion, with total assets worth over $111 trillion), we all enjoy the fruits of those assets in the form of jobs, services, products, and infrastructure. Does a worker really care who owns the building he works in? Who pays his salary? Who owns the toll road he drives to work on? Who owns the tools he uses? He shouldn't. What's important is that the assets that have generated our record-setting wealth are available to all of us, everyday.

The Fed recently updated its calculation of households' debt service burdens, as of Q2/17. Total household liabilities climbed to a record $15.2 trillion, but that represents less than 14% of total household assets. As the charts below show, households' financial burdens (the cost of servicing debt as a percent of disposable income) are about as low as they have been for decades. And households' overall leverage (total debt as a percent of total assets) has fallen by one-third since its record high in early 2009.

On balance, U.S. households are in very healthy financial shape, and that in turn means that the fundamentals of the U.S. economy are also in good shape.


zumbador said...

Excellent information
Thank you

WealthMony said...

That bottom chart is amazing. As a percent of assets our liability levels put us back into the late 1990s. Some assets were beginning to be heavily overpriced at that time (NASDAQ) whereas in 2007 a different asset was highly overpriced (Housing). The collapse of those asset prices made a significant change in the ratios, in households' ability to service debt that had been easily maintained prior to the collapse.

Stocks are expensive today but not close to the 2000 overvaluations and housing is not in the euphoric conditions of 2007. That would lead me to think these strong ratios of today are even stronger than back in those two highly dangerous periods.

But the ability to service one's debt without reducing one's total assets is income. That means we need to own productive assets, assets that generate an income or add read value.

As to not caring who owns the assets I make use of, I think I don't care as long as the cost to use those assets is not overly burdensome. If the cost for using the toll road gets too high or my rent goes beyond my ability to pay, I will resent those who own those assets and rising collective resentment could lead to rebellion and conflict. That calls for a system that allows for fairness. Free market capitalism does just that.

Scott Grannis said...

I would add that household liabilities have increased by only 4% since their 2008 peak. So the deleveraging has been virtuous from almost any perspective: reduced debt loads relative to incomes, increased savings (bank savings deposits are up $5 trillion in the past 9 years), and increased equity holdings (bolstered by huge increases in corporate profits), and a modest 8% increase in the value of real estate holdings since their 2006 peak.

Benjamin Cole said...

Great charts and commentary.

Whether for good or bad, the Dodd-Frank and attached regs more or less cut people with lower FICO scores and miidle-lower incomes out of the home mortgage market.

This may account for the lack of leverage presently.

Maybe this is a good change.

On the other hand, Kevin Erdmann, of Idiosyncratic Whisk, points out that home mortgage defaults were spread evenly along the mortgage spectrum, including jumbo loans.

So the response to the housing "bubble" of 2008 was to cut off middle-lower income people from buying a house, even though upper-inome people defaulted as often.

Perhaps somewhat as a result, housing production in the US has never recovered from the 2008 Great Recession.

Super-duper investors Blackstone say housing is a good investment. Scarcity jacks up values.

I think Blackstone is right. New housing production is very weak, socialistic property zoning often thwarts free markets, yet immigration continues, and we can hope economic growth continues too.

If you can buy a quadplex in SoCal….or select a REIT or private-equity play with exposure to barrier-to-entry markets….

Christian S. Herzeca, Esq. said...

that household leverage chart opened my eyes!

query whether there is too much emphasis placed on public debt to gdp leverage and too little on household leverage.

The Cliff Claven of Finance said...

This column may be useful if you are only interested in the top 10% of wage earners
and people who used to be in the top 10% before they retired.

A recent study from GoBankingRates found that 69% of Americans surveyed had less than $1,000 in savings. And about one-third had no money in reserve.

A recent poll conducted by Harris Poll, on behalf of CareerBuilder, found over three-quarters of American households
are forced to live paycheck to paycheck to make ends meet.

Research published last year by the Federal Reserve Bank found that 46% of respondents said they would be challenged
to come up with $400 to cover an emergency expense, and would likely borrow or sell something to afford it.

When the Fed asked what types of emergency expenses Americans had actually faced in the last year, more than one out of five cited a major unexpected medical expense.

The average unexpected expense was $2,782, or almost seven times higher than the Fed’s hypothetical $400 surprise bill.

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