The 90% Versus the 10%

Last week the Federal Reserve released the Flow of Funds (FOF) report for the quarter ended December 31, 2012.  The report showed that household sector net worth increased by $1.2 trillion during the quarter to $58.5 trillion.  The financial crisis and subsequent recession has been marked by an enormous decline in household net worth, due both to falling housing prices and falling stock prices.  After peaking at $66 trillion in 2007, household net worth plummeted to $50 trillion by early 2009.  The recovery since then largely represents strength in stock prices.  We won’t receive data for the first quarter until sometime in June, but based on the performance of the S&P500 index since December 31 (up about 9%) we can estimate that household net worth will be above $60 trillion at March 31 (barring a market collapse over the next two weeks).  This means that household net worth has recovered almost two thirds of the way back to its prior peak. 

This is true for the total household sector, and therefore for the “average” household, but it is not true for the median household.  While the FOF report does not break out the distribution of asset holdings, liabilities and net worth, another Federal Reserve publication, the Survey of Consumer Finances (SCF) does do so.  The SCF is based on a survey of 5,000 families that is conducted once every three years.  The survey collects data on the age, income, education and race of the head of the household, as well holdings of financial and tangible assets, debt and net worth.   The survey shows that the median household balance sheet is dominated by the value of the family home and the mortgage debt against that home.  Financial asset holdings are significant only for the top deciles of the income or net worth distributions. 

Speaking broadly, we can distinguish three groups of households:  1) those that do not own a home (approximately 35% of households), 2) those that own a home and this is their primary asset (about 55% of households), and 3) those that own one or more homes and also own substantial quantities of financial assets (stocks and bonds).  This last group constitutes about 10% of the population and this group has enjoyed dramatic improvement in net worth over the past three years (after getting utterly lambasted in 2008).

The latest available SCF (2009) suggests that the median household has a home worth about $150,000, has mortgage debt against the home of $100,000, financial assets of $40,000 and consumer debt of about $20,000.  This median household has benefited modestly from the recovery in stock prices, but this is largely or completely offset by continued declines in housing prices.  Even though strapped by high unemployment, stagnant wages and high gas prices, we would expect this median household to attempt to increase its savings rate.  At least, we would if the return to saving was more attractive.

The macro implication is that despite the increase in overall net worth, for most families there will be no wealth driven impetus to consumption spending.  The fact that most households are not participating in the aggregate wealth improvement is probably a contributing factor to the political potency of the class divide argument.

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