Q. How about an update on wealth after the "bear market"? Your last one was June 4 ,2000.
If the data hasn't been updated, can you take a guess?
---C.P., Dallas, TX
A. We can guess but it would be just that--- a guess. Most wealth studies are based on the Federal Reserve Survey of Consumer Finances that is done every three years, the last being 1998. We probably won't see any data from the 2001 survey until late 2002.
We can, however, make some good guesses based on the Flow of Funds figures, also compiled by the Federal Reserve. Here are a few observations:
•
We're suffering a decline in net worth. While that may seem cosmically
obvious, it's also very rare. Examining the Flow of Funds figures from
1945 to the present, there hasn't been a decline in the net worth of
households (and non profit organizations) in the entire period--- until
last year. That's a long time and it makes the year 2000 noteworthy.
Although 1973 and 1974 were devastating years for the stock market,
household net worth continued to rise. In the second and fourth
quarters of 2000 stock market losses overwhelmed other gains.
Household net worth declined for the year. It appears to be doing the
same this year, with a $1.5 trillion loss in the first quarter and a
nearly certain loss in the third quarter.
•
Gains in real estate dominated household net worth until the mid
eighties. Even now, gains in real estate offset some losses in the
stock market. In the first quarter of this year, for instance,
household net holdings in real estate rose by $227 billion while the
value of corporate equities fell by $1,012 billion and the value of
mutual fund shares held fell by $331 billion.
•
Financial assets now dominate the household balance sheet. In 1980
homeowner equity in real estate was $2,010 billion while household
ownership of equities and mutual funds was $921 billion--- less than
half as much. Financial asset ownership surpassed home equity in 1993.
By the second quarter of this year, home equity amounted to $6,500
billion, significantly less than the $9,225 billion in equities and
mutual funds.
In spite of these figures, residential real estate still means more to most people than the value of equities or mutual funds, even though financial assets have overtaken real estate in household net worth.
The reason for this is simple: holdings of financial assets have always been highly concentrated.
According to a study of changes in wealth distribution by Federal Reserve economist Arthur B. Kennickell, the bottom 90 percent of all households owned 64.5 percent of all residential real estate in 1998 but only 17.8 percent of all stocks. The next nine percent owned 26.6 percent of the real estate and 39.4 percent of all stocks. The top one percent owned 8.9 percent of the real estate and 42.8 percent of all stocks. In other words, most of us are about 4 times as sensitive to real estate as we are to stocks while the top 1 percent is the reverse--- 4 times as sensitive to stocks as to real estate.
Measured another way, home value accounts for nearly 70 percent of the net worth for 9 out of 10 households in America and home equity (home value less mortgage debt) accounts for nearly 40 percent of net worth. Stock ownership accounts for about 11 percent of net worth.
Indeed, ninety percent of all households had nearly as much at stake in the used car market ($971.8 billion) as they had in the stock market ($999.1 billion) in 1998. Bottom line: for nine out of ten households in America, the stock market is still just an interesting sideshow. It's important---but not that important.
The real impact of the current stock market decline will work itself out through the households whose wealth puts them in the top 10 percent.
And where does that start? In the neighborhood of $500,000.
Readers who would like to examine the source data for this column are invited to these website sources:
The Kennickell paper on Distribution of Wealth changes.
The Federal Reserve current and historical flow of funds figures.
