Household Net Worth: The 'Real' Story

by: Doug Short

Note from dshort: With yesterday's release of the Fed Flow of Funds for Q4 2012, I have updated this commentary to incorporate the latest data.

Let's take a long-term view of household net worth from the latest Flow of Funds report. A quick glance at the complete data series shows a distinct bubble in net worth that peaked in Q4 2007 with a trough in Q1 2009, the same quarter the stock market bottomed. The latest Fed balance sheet shows a total net worth that is 25.5% above the 2009 trough and only 2.0% below the 2007 peak. The nominal Q4 net worth is up 1.8% from the previous quarter and up 9.0% year-over-year.

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But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 6774%. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.

But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew six-thousand-plus percent, the value of the 1950 dollar shrank to about nine cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

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Here is the same chart with an exponential regression through the data. The regression helps us see the twin wealth bubbles peaking in Q1 2000 and Q1 2006, the Tech and Real Estate bubbles. The trough in real household net worth was in Q1 2009. From that quarter to the latest data point, net worth has been trending at about the same growth rate as the overall regression, but we are currently 11.6% below the regression.

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Let's now zoom in for a closer look at the period since 2000. I've added some call-outs to highlight where we are currently with regard to the all-time peak and 2009 trough.

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Let's now compare the nominal and real statistics for the peak-to-trough and recovery-to-date.

  • Peak: The nominal peak occurred in Q3 2007; the real peak occurred in Q1 2007. The Q4 2012 nominal net worth is 2.0% below peak. The real net worth is 12.4% below peak.
  • Trough: The nominal and real troughs occurred in Q1 2009, the same quarter in which the market bottomed. The nominal peak-to-trough decline was 23.7%. The real decline was 26.0%.
  • Recovery to date: The latest Flow of Funds report shows a nominal recovery of 28.5% off the trough. The real recovery is 18.3%.
  • Quarter-over-quarter: Nominal total net worth in Q4 increased 1.8% from the previous quarter. The real increase was also 1.8% to one decimal place.
  • Year-over-Year: Nominal total net worth in Q4 rose 9.0% from Q4 2011. The real increase was 7.0%.

We'll take another look at the nominal and real numbers after the release of the Q1 2013 Flow of Funds data in June.

Note: I've referred to this data series as "household" net worth. But, as I show in the chart titles, it also includes the net worth of nonprofit organizations. The ratio of two isn't clearly defined in the Fed data, and it obviously varies by asset and liability component. I've seen estimates that the nonprofit component is around six percent of the total net worth.

One easy (and rather illuminating) point of comparison in the Flow of Funds data is the relative share of real estate at market value (B.100 lines 3, 4, and 5). In the latest report, nonprofit organizations account for 6.0% of combined household and nonprofit real estate (down from 6.1% last quarter). That percentage in the quarterly data has ranged from a high of 9.2% in 1974 to a low of 4.0% in Q4 2004, a few of quarters before the peak in the residential real estate bubble.