Net Worth Grows Despite Real Estate Woes
Kurt Brouwer December 7th, 2007
Sorry for the bad rhyme in the title. I just could not help myself. The Wall Street Journal’s Real Time Economics Blog reports on the quarterly data from the Feds on household net worth. Net worth actually grew in the third quarter, despite a decline in home equity [emphasis added below]:
Homeowners’ Real-Estate Equity Tumbles (Real Time Economics Blog, December 7, 2007)
‘The latest set of figures to capture the housing bubble’s deflation: today’s quarterly flow of funds data from the Federal Reserve.
U.S. homeowners’ real estate equity dropped a record $128.5 billion, or 1.2%, in the third quarter to $10.6 trillion as home prices fell and mortgage debt rose. That’s the second quarterly decline after surging 38% from 2002 through the end of last year. In the second quarter of this year, homeowners’ equity dropped by $31.4 billion from the peak, $10.7 trillion, reached in the first quarter.
But the housing contraction still hasn’t pushed overall household wealth into negative territory. Net worth rose 1.1% in the third quarter to $58.6 trillion, slower than the 1.9% gain in the second quarter, the Fed said. (The total value of household assets rose $858 billion to $72.8 trillion; liabilities climbed $234 billion to $14.2 trillion.)’
Based on many articles I see, you would think Americans were one step away from financial catastrophe. Yet, net worth actually grew during a period of housing retrenchment. And, don’t get me started on the absurd claims that we are not saving. This issue of the dire status of Americans’ propensity to save is simply not accurate. In Good News on the Declining Dollar, Savings and More, we covered this issue in a bit more depth. In that post, we quoted Gerard Baker as follows [emphasis added below]:
‘…If you look at a simple measure such as the savings rate — the proportion of income that is saved rather than spent — Americans do look pretty spendthrift. It is close to zero in the US, compared with 10 per cent in Europe and much higher in Asia. But focusing on this one measure distorts the full picture of America’s household balance sheets. The reality is this: why save when the value of the investments you own is increasing at rapid rates? The total value of mortgage and consumer debt is indeed up by a massive $5 trillion since 2001, according to the latest figures published by the Federal Reserve.
But consider the increases in the wealth of Americans during that period. The aggregate value of houses alone is up $8 trillion. The increase in the value of stocks held either directly or through pension funds and other investment instruments is higher by another $8 trillion. That’s an increase in net wealth of American households of $11 trillion in less than six years. That’s about $90,000 for every household in the country. As someone once said, 11 trillion dollars here and 11 trillion dollars there and pretty soon you’re talking serious money…’
Many people who bemoan our national savings rate do not realize that the savings rate statistic does not include most investments nor does it include assets in retirement plans or even home equity. For more on this, see $57.9 Trillion — American Net Worth.
Net worth is the name of the game, not bank accounts and other low return forms of savings. Our net worth went up because we invest in homes and other real estate, in businesses, in stocks and bonds and many other types of investment.
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