Household Balance Sheet Repair Continues

According to the Federal Reserve's calculations, the net worth of U.S. households as of last December had increased by $5.7 trillion (up 11.6%) from the low of last March. The gains came from a combination of higher equity and bond prices and reduced debt that overwhelmed declining real estate values. This reflects a healthy realignment of households' balance sheets (lower debt ratios, less reliance on real estate), as well as healthy improvement overall. However, it will take a few more years before households have recovered their peak net worth.

I note that the ratio of households' tangible asset holdings to total assets is now 33.7%, which is below the average of this ratio (36.6%) since records began to be kept in 1950 (see chart below, click to enlarge). To me, this suggests that the correction in real estate prices has largely run its course. You might say that real estate is now somewhat "cheap" relative to financial assets. Think of the "tangible asset ratio" as a measure of how enthusiastic households are to own real estate instead of other sources of wealth such as stocks and bonds. Also note that the public's willingness to pay up for real estate is roughly correlated with underlying inflation, as the chart suggests. Tangible assets are a natural inflation hedge, so this makes a lot of sense. If inflation has bottomed out this past year and begins to rise in the years to come, then we could expect tangible asset prices to recover.

Comments

[j-dub]

All those who hate to pretend that not only is the financial crisis over, but that it never even happened, PLEASE TAKE ONE STEP FOWARD.
Not so fast, CBP.

"If inflation has bottomed out this past year and begins to rise in the years to come, then we could expect tangible asset prices to recover."

G-D forbid that happens, Grannis. Do you think that if enough inflation persists to the extent that housing prices come back, the Fed would have a chance in hell of keeping it under control.

No one can afford real estate, outside your circle of multimillionaires, when wages are falling and the rate of inflation is climbing.

In my opinion, you live in a complete fantasy world of privledge and luxury that couldn't comprehend what 90%-95% of the rest of the country lives like. This doesn't disqualify you from writing, but it does cost you that little thing called credibilty.
3,000 miles away, yet as souless as they are on 85 Broad Street

Mar 12 03:44 AM

[buyitcheap]

the balance sheet repair is consistent with what I've seen in my own client base. shorter/fewer vacations, reductions in revolving debt, sellling "extra" cars (3rd and 4th cars), timeshares, etc. And dropping of rents to keep tenants in place (and pay down notes.)

Clients' focus has been "laserlike" the last 18 months - if it isn't paying rent, it isn't occupying space.

Seems to be the case elsewhere as well.

Mar 12 05:27 AM

[Archman Investor]

Comical, as always from Scott Grannis as he sips martinis in his CA villa, and checks his multi million dollar bank account as 35 million Americans are on food stamps. Yes Mr. Grannis that is 10% of our country.
Even the WSJ still admits that the average American family is still 122% in debt and the debt reductions going on are simply a matter of outright default not payment to bring the accounts current.
Mr. Grannis continues his outright lies and distortions on his blog (which for some reason SA seems to think deserve to be published on a daily basis) while the real "facts", for those who are not dumbed down, show the opposite of what he states.

Household balance sheets are still awful, people defaulting on obligations is not "repair" and those people should not be allowed to walk away. However in this country it appears there is no sense of responsibility left anymore. It is a free for all.

Keep on pumping Mr. Grannis. You are doing a good job for your Wall Street buddies and your friends such as Larry Kudlow, et al

compdivplan.com

Mar 12 06:39 AM

[j_remington]

Orange County unemployment at 10.1%... few people here are paying for real estate at all.

Mar 12 06:52 AM

[damienhaas]

"To me, this suggests that the correction in real estate prices has largely run its course. You might say that real estate is now somewhat "cheap" relative to financial assets.".

Not only a lot of people still holding houses that are "underwater", Bank also still holding a lot of "housing assets" that are supposed to foreclose. Unless they want to hold an underwater asset forever and wait for the price to goes up(that will be a long time), the release of these "assets" will make real estate EVEN "cheap" relative to financial assets.

Mar 12 09:49 AM

[fro6]

Information + emotion = today's stock price at a ratio of 3 to 1 emotion.

Mar 12 10:31 AM

[ctjaeger]

The recovery in the household balance sheet is tenuous. Households have seen a 49% rise in Corporate Equity assets and another 35% in Mutual Fund assets since the March lows. Should the market turn south by any significant amount, households will be hurt badly.

Deleveraging - whether by default or paydown/frugal living - does have a positive impact on disposable income. Furthermore, defaults (while certainly devastating for individual households) have a "benefit" by virtue of the fact that the affected household is unable to borrow thereby curtailing consumption. I call this a benefit because it forces frugality and sustainable consumption.

The deleveraging move is much slower than one would like, but it is obviously more difficult to deleverage during a recession than during good times (household income is down). To get back to a 100% Disposable Income to Debt level, the consumer sector must extinguish another $3.2T in debt (mortgage and consumer credit). That is equal to about $27,000 per household.

At the current savings rate, that would mean it will take US households about 7 years to get their debt levels down to what is generally considered sustainable (although I think 100% is too high).

Mar 12 12:10 PM

[user396040]

There should be a big decline in household mortgage liability coming up as foreclosures, bankruptcies and short sales result in the cancellation of residential mortgages and reduce the indebtedness of many households. This is not the best way for household balance sheets to improve, but it is a little bit of a silver lining on the mortgage default cloud.

Mar 12 01:44 PM

[whidbey]

Hmmm..... The way in which the House Wealth is calculated is a matter of classification of assets, not monetary assets. So be careful of its portent. It over values owned real estate to the extend the mortgages of homeowners are at sufferance, unpaid and not revalued to market. Same with savings, look at what constitutes savings. SS contributions? Only political economist believe such nonsense.

This author is good example of a blandly optimistic pundit living in a former paradise, and hoping that politically tainted numbers are realistic and representative. The average "well off" Calf. household confronts tax increases that will shock them, and the loss of businesses from the golden economy will continue to be staggering. If you are blind get a dog, if you are dumb learn to read the footnotes and maybe the survey methods statement.

Mar 12 02:06 PM

[NUNAY the KING]

Let the short sells begin. Sell of the century! Its about time. Cramer said it best Friday night. Why are these banker fugitives not answering questions and spending time behind bars? How can accountants be allowed to sign off on those books, then make fortunes shorting the stock? Time for a few to get their just desserts, and for the little guy to get a shot at a home for 50% off.

Mar 13 03:25 AM

[BUZZER]

Why is it that the bottom 90% of the population are always offside when the balance sheets get rejigged?

With inflation comes debt relief, so the poor suckers that have been encouraged to pay down their debts and increase their savings in retirement accounts will lose twice; once by paying off their debts in whole dollars rather than wait for the inflation to let them use funny money; and again when they get the pensions, that were paid into using whole dollars, and which will be paid as retirement benefits in funny money.

Mar 14 12:39 AM

[punk_ash]

People who think that the houses have stopped going down are right and wrong. There are short sales all over. These prices are at the 1995-2000 price levels. Still few buyers. Reason is that it just takes too much money to own and maintain a place now and the money is in short supply.

Real estate taxes are not going down and neither are the prices of insurance and the utilities.

Mar 14 05:54 AM

[BUZZER]

Rents will rise to find a new ownership affordability equilibrium.

Mar 14 12:43 PM

[pigdog67]

punk_ash Lots of the short sales are cash only. I guess getting a mortgage takes too long or is too difficult? Real estate taxes are dropping as houses get re-assessed (mine dropped significantly). The Feds zero money policy is allowing me to have a 3.5% mortgage for this year and probably next year (maybe 3.0% next year). And my renter is covering my mortgage plus property taxes plus heat and utilities. So not a bad deal.
I am losing a little money but hoping housing will come back in 2015. Just a way to diversify I guess. I keep wondering if I should do one of those cash only foreclosure buys. I would definitely make money renting that out.

Mar 14 06:28 PM