The US Federal Reserve released the Q1 2010 update of the US household balance sheet at the end of last week. In particular, it is worthwhile to examine the overall improvement in US household wealth since the peak of the credit crisis in early 2009, as well as the extent to which the consumer has been able to improve their debt to income ratio.
Overall, US household net wealth has risen by an impressive $6.3 trillion since the worst of the credit crisis in Q1 2009, but remains $11.2 trillion below the record level set in Q3 2007.
US household assets:
Most US households assets are in the form of housing (27% of total), pensions (18% of total), direct ownership of listed equities (11% of total), bank deposits (11% of total), ownership of private business (10% of total), and mutual funds (6% of total). The fastest growing asset over a long-term period (since 1960) has been mutual funds (unit trusts), by a substantial margin. (see chart attached).
At the end of Q1 2010, the value of US household assets amounted to $68.53 trillion. This is $6.1 trillion above the Q1 2009 level, mainly as a result of a $5.5 trillion improvement in the value of financial assets (mostly in the form of listed equities, pension funds and unit trusts). In addition, the value of residential property has risen by $0.54 trillion over the past year. While total asset values are up $6.1 trillion relative to the worst of the credit rises, they are still $11.4 trillion below the record level set in Q3 2007.
(Out of interest, even though the total value of US household assets is $11.4 trillion below the peak, they currently equate to a staggering 114% of World GDP).
US household asset values have declined in only 26 of the last 233 quarters. 6 of the these declines occurred following the bursting of the Tech-bubble in 2001/2002 and another 6 occurred with the bursting of the credit bubble in 2008/2009. The total loss in household asset values during the credit crisis (-$17.5 trillion, or a decline of a staggering 21.9%) far exceeds the loss during the bursting of the Tech-bubble (-$2.8 trillion, or a decline of 5.5%).
US household liabilities:
At the end of Q1 2020, the level of US total household debt was a substantial $13.97 trillion; comprising mostly home mortgages (74% of total) and consumer credit ($17% of total). Household mortgage debt rose by a massive 104.3% from after 9/11 to the first quarter of 2008. That is an increase of $5.4 trillion in a period of just 7 years. During this time US new home starts rose from an annual rate of 1.55 million house to over 2.2 million homes a year in early 2006. (With the bursting of the sub-prime bubble, home starts fell to a record low of 477 000 a year in April 2009). The total stock of US housing units increased from 119.3 million in 2002 to 130.8 million in 2008, an rise of 10.8 million units in 6 years. Unfortunately, around 14.4 million homes are now currently vacant, which is extremely high by historical standards.
US consumer have been trying to deleverage. Consumer debt (excluding mortgage debt) fell by a significant $96 billion over the year to end Q1 2010; an annual decline in US consumer credit is actually a very rare event. In addition, US mortgage debt declined by a substantial $256 billion over the same time period. These declines coupled with a rise in personal income, has meant that the ratio of US household debt to personal disposable income has fallen from 131.4% in Q1 2009 to 125.9% currently. While this ratio would still be considered relatively high by historical standards, it is meaningfully below the peak of 136.4%, which was recorded in Q1 2008. Debt servicing costs has also been on the decline, dropping from almost 14% of disposable income in early 2008 to around 12% currently. (Total household debt is currently $596 billion below the all-time peak of $14.57 trillion).
The fall-off in household debt is naturally reflected in a rise in household savings, which has grown from a low of less than 1% of disposable income in early 2008 to 3.6% currently. Overall the consumer has clearly had some success in deleveraging relative to the peak of the credit crisis, but the improvement has not been spectacular, which clearly has both positive and negative implications for economic performance.
US household net worth:
As a result of the increase in assets values (mainly financial assets) over the past year, the net worth of US households rose to $54.56 trillion at the end of Q1 2010. That is $6.3 trillion higher than a year-ago, but still $11.2 trillion below the record level set in Q3 2007. US net wealth now represents a very respectable 491% of household disposable income. The current ratio is actually exactly in-line with the long-term ratio, which dates back to 1952, although there have been times when the ratio has risen over 600%. Ironically, with hindsight, a ratio of higher than 600% has been associated with an asset bubble (ie the Tech-bubble in 2001/2002 and sub-prime housing bubble in 2008/2009). Overall the US consumer remains extremely wealthy by historical and international standards; despite the high level of debt.
Interestingly, net wealth would have to fall by $9.0 trillion, or 16.6% relative to the end of Q1 2010, for the net wealth to income ratio to drop down to the lowest level ever. That is certainly not the base case expectation, rather we expect the net wealth ratio to slowly improve, but also hopefully not move back into bubble territory.
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