The US Federal Reserve released the Q3 2011 update of the US household balance sheet yesterday. In particular, it is worthwhile to examine the extent to which the consumer has been able to improve their debt to income ratio against a backdrop of declining net wealth.
(The SA Reserve Bank also released an update on developments in the South African household balance sheet yesterday. We will provide an analysis of the data in the coming days)
In Q3 2011 US household net wealth fell by a further $2.4 trillion, but remains $6.9 trillion above the worst of the credit crisis in Q1 2009; and in Q3 2011 it totalled a massive $57.4 trillion. US households continue to deleverage, with the debt to income ratio falling to its lowest level since Q2 2004. Debt servicing cost have also moderated very meaningfully.
US household assets:
Most US households assets are in the form of housing (26% of total), pensions (18% of total), direct ownership of listed equities (10% 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 Q3 2011, the value of US household assets amounted to $71.1 trillion, which is a substantial $2.5 trillion below the Q2 2011 level. Despite the recent decline in asset values, US households assets are still $6.6 trillion above the Q1 2009 level, which was the worst point in the global recession. Asset values are, however, $9.5 trillion below the record level set in Q3 2007.
US household asset values have declined in only 29 of the last 239 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 exceeded 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 Q3 2011, the level of US total household debt was recorded at $13.8 trillion, comprising mostly of home mortgages (71% of total) and consumer credit (18% of total).
Household mortgage debt rose by a massive 104% measured from 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 below 500 000 a year.
The total stock of US housing units increased from 119.3 million in 2002 to 130.8 million in 2008, a rise of 10.8 million units in 6 years. Unfortunately, around 14.3 million homes are now currently vacant, which is extremely high by historical standards. The excess stock of residential property continues to dampen property prices.
US consumers have been trying to deleverage, especially their exposure to mortgage debt, which is now $730 billion below the peak in Q1 2008. This decline, coupled with a rise in personal income, has meant that the ratio of US household debt to personal disposable income has fallen from a peak of 135% in Q4 2008 to 119% currently. While this ratio would still be considered high by historical standards, it is meaningfully below the peak. Debt servicing costs has also been on the decline, dropping from almost 14% of disposable income in early 2008 to around 11% currently.
The initial fall-off in household debt corresponded with a rise of household savings, which increased from a low of less than 2% of disposable income in early 2008 to peak of slightly over 6% in early 2009. The savings rate has since eased to around 3.5% as consumer start to reengage more fully with the economy.
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. US households will have to continue to adopt a relatively conservative approach to debt and spending over the coming years.
US household net worth:
As a result of the decrease in asset values during Q3 2011, the net worth of US households fell to $57.3 trillion at the end of Q3 2011; a decline of $2.4 trillion relative to end Q2 2011. Net wealth is still $6.9 trillion higher than at the worst of the credit crisis in Q1 2009, but $9.4 trillion below the record level set in Q2 2007.
Despite the recent decline in asset values, US net wealth represents a very respectable 495% of household disposable income. The current ratio is very close to the long-term average of 494%, 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 still high level of debt and recent weakening in asset prices.
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