Historic Asset Boom Passes By Half of Families (#GotBitcoin?)
Scant wealth leaves families vulnerable if recession hits, economists say. Historic Asset Boom Passes By Half of Families (#GotBitcoin?)
The decadelong economic expansion has showered the U.S. with staggering new wealth driven by a booming stock market and rising house prices.
But that windfall has passed by many Americans. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003, according to recent Federal Reserve figures. The top 1% of households have more than twice as much as they did in 2003.
This points to a potentially worrisome side of the expansion, now the longest on record. If another recession comes, it could be devastating for people who have only just recovered from the last one.
Wealth, also called net worth, is the value of assets such as houses, savings and stocks minus debt such as mortgages and credit-card balances. Net worth is different from income, the cash a household receives each month such as wages, dividends and government benefits. It is common for countries to have a highly skewed wealth distribution. Nonetheless, in the U.S., wealth inequality has grown faster than income inequality in the past decade, making the current wealth gap the widest in the postwar period, according to a study by Moritz Kuhn, Moritz Schularick and Ulrike Steins, economists at the University of Bonn.
Behind this trend: More than 85% of the assets of the wealthiest 1% are in financial assets such as stocks, bonds or stakes in private companies. By contrast, slightly more than half of all assets owned by the bottom 50% of households comes from real estate, such as the family home. Economic and regulatory trends over the past decade have not only favored stock over housing wealth, but have also made it harder for the less affluent to even buy a home.
Since 2009, home prices have outpaced incomes, making it harder for families to purchase their first home.
Until the mid-2000s, the net worth of households across the wealth distribution increased at roughly the same pace, keeping inequality stable. That started to change when housing prices took off in the early 2000s. For the bottom 50%, rising home values were more than offset by mortgage debt, which almost doubled between 2003 and 2007. For the top 1%, debt was flat between those years. When the housing bubble burst, many less-affluent households saw housing wealth wiped out; some lost their homes altogether.
Today, the bottom half of American households aren’t carrying so much debt compared with the prerecession peak, after adjusting for inflation. And starting in 2012, a recovery in home prices has allowed their net worth to inch up. But house prices, adjusted for inflation, have yet to reach their 2006 peak, according to the S&P CoreLogic Case-Shiller index. Meanwhile, a decade of rising equity prices has buoyed the 1% wealthiest households, pushing the value of their financial assets up 72% since the recession, after adjusting for inflation.
Paying The Mortgage
The bottom 50% of households saw a much bigger rise in mortgage debt during the housing boom than wealthier households.
Structural economic forces have affected the wealth of the rich and the lower-middle class differently. The Fed kept interest rates near zero and bought bonds in the years after the crisis to revive the economy, in the process amplifying the run-up in asset prices. “Who owns that stuff? Rich people,” said Karen Petrou, managing partner at Federal Financial Analytics.
Meanwhile, the share of families in the bottom half who own a home has fallen to about 37% in 2016, the latest year for which data are available, from 43% in 2007, according to the Fed. Homeownership among the entire population has crept up since 2016.
For those who lost a house during the recession or never had one, getting a toehold in homeownership has become more difficult. Partly because of regulations designed to prevent another crisis, banks have toughened credit standards and down-payment requirements, said Susan Wachter, a University of Pennsylvania economist. Had the looser, prerecession credit standards stayed, the proportion of Americans who own their home would have been 5.2 percentage points higher in 2010-2013, a study by Ms. Wachter and three co-authors estimates.
Builders have focused on higher-end homes for those with good credit and high incomes. As a result, affordable homes have become scarcer and more expensive. Between 2011 and 2017, the inflation-adjusted price of a starter home rose 56%, according to CoreLogic, a data provider. Real median incomes increased 12%, according to the Census.
Veronica Cortez, a 30-year-old municipal employee in San Fernando, Calif., is working on paying down her debts. She takes home between $3,500 and $4,000 a month depending on overtime, of which about half goes for the rent on the two-bedroom apartment she shares with her two children. She intends to buy a home, but “here in California it’s expensive,” she said. “You pretty much live paycheck to paycheck. It’s going to be impossible for me to save up $20,000 or $30,000 for a down payment.” She has set aside $6,000, so far, and plans to apply to assistance programs to help cover the rest.
Wealth helps households weather the ups and downs of the business cycle. In good times, they pay for living expenses out of their income and set the remainder aside. In bad times, when layoffs hit, those savings can help pay bills.
How The Other Half Lives
The net worth of the bottom half of American households has been slow to come back from the recession.
Households with little wealth, however, are more exposed to the vagaries of the economy. Areas that saw a bigger drop in housing wealth after the recession also suffered a sharper decline in consumption, according to research by economists Atif Mian, Kamalesh Rao and Amir Sufi.
“If no shock is happening then everything is fine, but if a shock is happening you have a much more fragile economy,” said Mr. Kuhn.
Leticia Segura ’s house in the West Humboldt Park neighborhood of Chicago lost about half its value during the recession, she said. Today, it is worth about $250,000, still almost $30,000 short of its value in 2007, she said.
Ms. Segura and her husband, Jesus, almost lost the home to foreclosure during the crisis after Mr. Segura lost his job and the couple fell behind on mortgage payments. A government program helped the couple get current, but they remained underwater on their mortgage until just a few months ago, meaning they owed more than their home’s value.
Today, both have new jobs and Ms. Segura feels more comfortable financially. But the couple remains cautious. They have set aside some money to cover the mortgage for three or four months should disaster strike again. “After that we’d just have to pray,” she said.
Pace Of Growth Slowed For U.S. Household Net Worth In Second Quarter
Much of the gains came from stocks, despite equity markets’ bumpy ride in April and May.
The net worth of American households grew in second quarter, but at a slower rate than the prior quarter.
Household net worth grew 1.64% in the second quarter to $113.5 trillion, compared to a 4.99% growth rate in the previous three-month period. However, the first-quarter growth was largely a bounceback after stock-market declines produced a contraction in household wealth in 2018’s fourth quarter.
Much of that gain comes from a 3.3% rise in the value of household holdings of corporate equities. Stock markets bounced up and down in April and May as the threat of trade conflicts waxed and waned.
Household retirement assets—those held in workplace or personal savings plans such as 401(k)s or IRA’s—grew 1.4%.
The figures come from a quarterly report issued by the Federal Reserve known as the Flow of Funds, which tracks the aggregate wealth of all U.S. households and nonprofit organizations.
****** The report offers no details of how that wealth is distributed among households. The figures also not adjusted for inflation. ******
Americans also ramped up borrowing and saved at a slower rate. Growth in household debt accelerated to a seasonally adjusted annual rate of 4.26% in the second quarter, the strongest pace since the fourth quarter of 2017.
The household saving rate fell to 8.03% of disposable personal income, down from 8.49% in the first quarter.
The pace of borrowing by businesses slowed, however. Business debt grew at a seasonally adjusted annual rate of 4.36% in the second quarter down from 6.72% in the first quarter.
Federal government debt rose 2.08% in the quarter, a slower pace than in the first quarter, while state and local debt fell 2.51%.
U.S. Household Net Worth Hits Highest Level Ever
Increase follows record drop caused by the economic fallout of the coronavirus pandemic.
A resurgent stock market and fiscal stimulus propelled the net worth of U.S. households to the highest level ever in the second quarter, despite a record drop in the previous three months caused by an economic shock from the pandemic.
The net worth of American households and nonprofit organizations jumped 6.8% in the second quarter from the first, to $118.96 trillion. That is about $380 billion more than at the end of 2019, before the coronavirus pandemic wiped out more than $7 trillion of household wealth.
The figures, published in a quarterly Federal Reserve report known as Flow of Funds, illustrate the coronavirus’s historic hit to the U.S. economy, followed by a swift start toward recovery.
Economists say the U.S. economy and labor market are recovering more quickly than expected from the downturn sparked by the pandemic and related lockdowns earlier this year. Business and academic economists polled recently by The Wall Street Journal expect gross domestic product to increase at an annualized rate of 23.9% in the third quarter, following a decline of 31.7% in the second quarter.
Household net worth consists of the difference between assets—such as bank accounts, stock investments and real estate—minus liabilities such as mortgage balances and consumer debt.
The component that was most severely affected by the pandemic was the value of corporate equities owned by households, which fell 25% in the first quarter from the end of 2019. But most of those losses were recouped in the second quarter, when the value of equities stood at $19.52 trillion—or just 8.3% below their year-end level.
The S&P 500 fell more than 30% from mid-February to late-March as the spread of Covid-19 caused investors to panic. By mid-August, however, U.S. stocks had recovered those losses.
Household real estate and bank-account values have continued to rise, on the other hand, with the latter likely bolstered by stimulus checks and enhanced unemployment benefits during the second quarter. The personal saving rate—the amount of households’ after-tax income that isn’t spent—surged to a record 26% in the second quarter from 9.6% in the first.
“The fiscal stimulus that we’ve received so far has been really important in shoring up household balance sheets, and it was instrumental to the recovery in consumer spending that we’ve seen in the third quarter,” said Blerina Uruçi, a U.S. economist at Barclays.
Most of the increase in debt amid the pandemic has occurred on business and government balance sheets, the Fed report showed. While the nonfinancial debt of households rose just 0.5% in the second quarter from the first, business debt climbed 14% and federal-government debt surged 59%.