Few readers will be thrilled by this revelation but the Flow of Funds data, which I think of as the Money River of America, tells us a whole lot about how we, collectively, are doing.
I can tell you right now that the news will be good for two simple reasons.
• First, home prices continue to rise. Some may whisper "bubble" but anyone who owns a house that's rising in value won't care.
• Second, virtually all of the return equity investors enjoyed last year came in the fourth quarter. Financial assets will be up a bunch. Houses and equities outpace the continuing rise in mortgage and consumer debt.
All that information can be found in a single table, the "Balance Sheet of Households and Nonprofit Organizations." So lets do a little data scanning and see what we learn, using the figures from 1999 to the third quarter of 2004 that are available as this is written. Here are the big items:
• Yes, we've got post-traumatic stress syndrome--- but the crash is definitely over. Consumer net worth bottomed sometime between the end of 2002 and early 2003. It has been rising ever since. Our collective net worth was $42.36 trillion in 1999. It bottomed at $39.72 trillion in 2002. Powered by rising residential real estate prices, we had recovered by the third quarter of 2003. By the third quarter of 2004 our net worth was $46.68 trillion, up 10 percent from 1999. The year-end figures will nudge that even higher.
• The biggest single asset, household real estate, also showed the greatest gain. Between 1999 and late 2004 the value of our homes grew by more than $6 trillion. This is important because nearly 70 percent of all households own homes. Home equity is the biggest single component of net worth for the majority of American households.
• Mortgage debt grew in lock step with home values. At the end of the period owner equity as a percentage of household real estate was essentially unchanged at 56 percent.
• The total value of corporate equities--- the ownership form favored by the wealthy and near wealthy--- is still far below its 1999 peak of $9.17 trillion. It bottomed at $4.86 trillion in early 2003 but had recovered to only $6.13 trillion at the end of the third quarter of 2004. Much of the real hit from the crash fell on those with the most wealth, the ones most capable of sustaining a loss.
• Ownership of mutual fund shares, worth $2.99 trillion in 1999, bottomed at $2.29 trillion early in 2003. It had risen to $3.24 trillion late in 2004. Whatever damage we suffered in our 401(k), IRAs, and other retirement investments in the crash, most people have recovered and then some. Only wealth beyond our wildest dreams has been lost.
• Even consumer credit isn't so worrisome. The value of the consumer durables we own is up 28.8 percent to $3.56 trillion. The value of the consumer debt we carry is up 33.8 percent to $2.09 trillion. Basically, we continue to leverage our "stuff."
Viewed as an average river, we're moving along nicely. Unfortunately, some people in that river are in over their heads. At all levels of income or assets some households owe too much. The 2001 Survey of Consumer Finance revealed that being over-indebted wasn't just a problem with lower income households--- except for the top 10 percent households, 16 to 18 percent of the remaining households had debt commitments that absorbed more than 40 percent of their income.
Finally, there is the "Household Portfolio"--- the proportions of our collective assets and liabilities. For every $100 of assets we own collectively, we have about $31 of residential housing, $7 of consumer durables (cars, appliances, home furnishings, etc.), and $62 of financial assets. We owe about $18 against those assets in mortgage and consumer debt. That leaves us with $82 of net worth for every $100 of assets. These figures are very heavily skewed by the concentration of financial assets in the wealthiest households.
If your house accounts for more than 31 percent of your total assets--- and it will for the majority of people who own houses--- gains in home prices have fully offset any losses in financial assets.
It may be time to stop cringing.
On the web:
Federal Reserve Flow of Funds, next release March 10, 2005 for Fourth Quarter, 2004.
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