U.S. Household Net Worth Hits New Record High
Halbert Wealth Management
By Gary Halbert
March 12th, 2014

1. Household Wealth Hits New All-time High

2. Great News But the Economy is Still Sluggish

3. US Economy “Growth Deficit” Hits $1.31 Trillion

4. February Employment Report Better But Not Good

Overview

The Federal Reserve announced last Thursday that US household net worth reached a new record high by the end of last year – at $80.7 trillion. The Fed said the new record was made possible largely due to vaulting stock prices, increased home values and Americans paying off more of their debts.

Much of the surge in net worth went to affluent families and older Americans. Both groups are less likely to spend their gains and more likely to save and build more net worth – which is not particularly good for the economy unless it translates into new jobs.

Meanwhile, many Americans continue to pay down their debts, a trend referred to as “deleveraging.”  Total household debt fell from near $13 trillion in 2008 to just under $11 trillion in 2012. For better or worse, that trend seems to have reversed in 2013 as more Americans started to take on debt again. We’ll discuss the details as we go along today.

We also take a look at why the economic recovery is still sluggish, some four years after it officially began. Specifically, we’ll compare the current recovery with the average of the last 10 economic recoveries to determine the size of our so-called “growth deficit.”

Household Wealth Hits New All-time High

Americans’ collective wealth hit the highest level ever at the end of last year, according to data released last Thursday, reflecting a surge in the value of stocks and homes that has boosted the net worth of many US households.

The net worth of US households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to the latest Federal Reserve report. Even adjusted for inflation, the Fed’s preferred gauge of prices, US household net worth – the value of homes, stocks and other assets, minus debts and other liabilities – hit a new record.

The Fed report shows Americans have made considerable progress in repairing the damage inflicted by the housing crash and recession, which ran from December 2007 through June 2009 and decimated the wealth of a wide swath of the nation. Yet as of December 31, 2013 the net worth of the nation has vaulted to the highest level ever recorded by a sizable margin above the previous high in 2007.

Record Riches

Driving much of the past year’s gains was the record-setting rally in the US stock markets, which saw the Standard & Poor’s 500 Index soar over 32% (including dividends) last year. The increase in stock prices has disproportionately benefited affluent Americans, who are more likely to own shares. The value of stocks and mutual funds owned by US households rose a whopping $5.6 trillion last year.

Holdings of stocks and bonds as a share of overall net worth, at 35%, is at the highest level since the dot-com bubble burst in 2000, Fed data show. That means that even as wealth increases, it’s increasingly going to the affluent. The media complain almost daily about “income inequality,” but it’s really nothing new.

In addition to the affluent, much of the wealth surge is going to older Americans. Both groups are less likely to spend their gains and more likely to save and build net worth. Meanwhile, sheer demographics – the retirement of the Baby Boomers and America’s aging population – are increasing the ranks of the nation’s savers.

The improving housing market also boosted household wealth. The S&P/Case-Shiller national home-price index rose 11.3% in the 4Q of last year from the same period in 2012. That’s the biggest year-over-year advance in home prices since the first three months of 2006, eight years ago.

Total Debt Balances Household Net Worth
Household Net Worth

Household real estate assets climbed by $401.1 billion in 2013, the data show. Owners’ home equity as a share of total household real estate holdings increased to 51.7% last quarter from 50.6% in the previous three months. That’s up from a record low of 36.5% in the first three months of 2009.

Great News But the Economy is Still Sluggish

You’re probably wondering, what with household wealth at a new record high, why is the economy not doing better. That’s a great question.

Following the financial crisis and recession of late 2007-early 2009, the ensuing economic recovery has been the weakest rebound since the Great Depression. As I reported last week, the Congressional Budget Office revised its economic growth number to only 1.9% for 2013. That’s hardly a robust recovery. So what did the latest Fed report have to say about that?

The Fed’s report last week on household wealth did include some analysis on why the recovery has not been stronger. One reason the economic recovery has been so weak since the end of the recession is that many Americans have been digging out of a mountain of debt.

As you can see in the chart below, total household debt – including mortgages, credit cards, student loans and car loans – soared to almost $13 trillion in 2008. Since that peak, total consumer debt declined to just under$11 trillion in late 2012. Rather than spending and taking on more debt, many Americans have been paying off their loans and credit card balances.

We’ve all heard the term “deleveraging” over the last few years. In this context, deleveraging means that consumers have been paying down their debts, rather than taking on more, since the recession. That has meant slower growth in consumer spending which accounts for apprx. 70% of GDP.

According to the Fed report last Thursday, total US household debt was about 109% of disposable income at the end of last year, down from a peak burden of 135% in late 2007. This more manageable debt burden could prompt American households to begin to borrow and spend more later this year, even though the job market remains sluggish and income growth weak.

And we can see this increase in the chart above in the last two bars showing households taking on more debt late last year. In the 4Q of last year, total household debt rose to $11.52 trillion, according to the Fed’s latest data.

Indeed, overall household borrowing rose an annualized 0.9% last year, the biggest percentage rise since 2007. Last year also saw the smallest decline in mortgage debt since 2008, a sign that fewer Americans are entering foreclosure and more are taking out new mortgages. Other types of consumer credit grew 6% last year, though much of these gains were due to student loans.

As I have written numerous times before, the financial crisis and severe recession of late 2007-early 2009 scared the wits out of millions of Americans, many of whom lost their jobs. As a result, it will likely be several more years before consumers are willing to take on significantly more debt and resume their pre-crisis spending habits, if ever.

Let me be clear: I am not in favor of Americans taking on more debt; in fact, I wish Americans would continue to reduce their debt burdens by deleveraging and saving more for retirement – which the data suggest they won’t. In the short-run, if Americans resume taking on more debt, it will be good for the economy in terms

1, 2  - View Full Page