US Household Net Worth Climbs to exceed 2007 highs (for now…)

According to the latest Flow of Funds report issued by the Federal Reserve,  US household net worth has improved materially and finally exceeded its pre-crisis peak. A rising stock market, improving housing prices, and low mortgage rates all contributed to the net worth increase of $3 trillion recorded during the first quarter of the year for households and non-profit groups. Household net worth is currently at $70.3 trillion, up 4.5% from the preceding period, the FED showed.

Even though the US debt situation led to higher payroll taxes during the first quarter, the rise was not enough to prevent a gain in the colective wealth of US households as the rise in the stock market has been very substantial and recently made new record highs. The S&P 500 closed out the first quarter with a gain of 10%, having accumulated an extra 4.7% gain since then. With the FED pumping unlimited money into the US economy, retail investors have neen enticed to return to the market after a long period away due to the scarring they saw from financial crisis that wiped out half of their savings. At the same time, with the FED buying mortgage backed assets, mortgage rates have remained low for a prolonged period, helping households pay down debt and improve their mortgage situation.

Financial assets owned by American households, including stocks and pension funds, increased by $2.1 trillion during the first quarter, currently valued at $51.7 trillion, and a substantial part of total household assets. Until now, this asset skew has been beneficial for households but, if the FED stops QE3 and the stock market drops, household net worth will quickly decline again, a situation the FED will certainly want to monitor closely.

Household real-estate assets climbed by $837 billion while owners’ equity as a share of total household real-estate holdings increased from 46.7% to 49.2%. The recovery in the housing market is supporting such gains. Property values have been advancing for 13 consecutive months now.

Auto sales are also picking up as consumers have snapped up new vehciles with the improvement in confidence and expectations on future jobs and income.

Despite the improving conditions that has led to the rise in household net worth, it seems the US consumer is still reluctant to borrow. That has been the tendency across the globe and one of the reasons why monetary policy has failed to improve the economy in a substantial way. With the heavy losses which resulted from the 2007 crisis, households entered a long and tough de-leveraging period and they aren’t prepared to start borrowing again. Household borrowing in fact dropped at an annual pace of 2.3% during the first quarter and domestic non financial debt is currently 6.3% below the 2007 level. Consumer deleveraging may be a thorn in the shoe to US policymakers though as the US economy depends 70% on private consumption.

While the US consumer continues to refrain from borrowing, the federal government is certainly not following suit! From 2007 until the last quarter, the federal government increased its debt by 150%. It’s interesting to note that while that happened, the yield on 10y US Treasury Notes is still not much above 2%, a clear signal the FED is distorting the risk perception with its bond buying program. This we expect to change in the near future as yields continue to rise and that may very well act as a brake on further US household net wealth growth.