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A wild ride but strength in household balance sheets

admin | June 21, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The fourth quarter of 2018 was a difficult one for asset prices. Stock indices fell sharply. Household balance sheets took a hit as a result. Fortunately, for equity owners, stock prices rebounded in the first three months of 2019, creating a woolly round trip for household asset values that brought things back by March 31 to roughly where they had been six months before.

Household asset values

The Federal Reserve’s quarterly Financial Accounts of the United States provide detailed information on household balance sheets. Household assets total over $120 trillion (the Fed includes nonprofit organizations in its household sector balance sheet tables). The largest two components, not surprisingly, are real estate and equities, each of which accounts for close to $30 trillion. The latter includes stocks directly held, mutual fund positions, and indirect holdings that accrue to households from life insurance and pension/retirement accounts.

The most recent release, which covered the first quarter of 2019, detailed a roller-coaster like ride for equity values. Stock prices sank when the S&P 500 dropped by 14% from September 28 to December 31, which slashed over $5 trillion from household balance sheets. But equity indices rebounded from December 31, 2018 to March 29, 2019, rising 13%. As a result, household equity holdings rose in value in the first quarter by $3.2 trillion.Overall household assets sank by nearly $4 trillion in the fourth quarter of last year but bounced back by almost $5 trillion in the first three months of 2019, establishing another new record of $124.7 trillion.

Similarly, the Federal Reserve’s measure of household net worth slid by $4 trillion in the fourth quarter of last year and bounced by almost $5 trillion in the first quarter of this year, jumping to over $108 trillion. Net worth as a percentage of disposable income slipped by 33 percentage points in the fourth quarter but made 25 percentage points back in early 2019 (see Exhibits 1 and 2). Exhibit 1 shows the long history of the series, which emphasizes how wealthy households are today relative to prior episodes. Exhibit 2 shows the same data over a much shorter time period, so that the harrowing round trip over the turn of the year is more evident.

Exhibit 1: Net worth to disposable income ratio

Source: Federal Reserve

Exhibit 2: Net worth to disposable income ratio 2008-2019

Source: Federal Reserve

Household debt

The extraordinary run-up in household net worth in the current expansion has been driven not only by rising asset values but also by remarkable restraint on the debt front. Having overextended themselves during the go-go 2000s, many households have turned far more conservative in the wake of the Financial Crisis. In fact, after peaking at just under 100% of GDP in 2009, household debt has been falling in relation to the size of the economy for a decade (see Exhibit 3).

Exhibit 3: Household debt-to-GDP ratio

Source: Federal Reserve, BEA

The reading of 76.3% in the first quarter of this year is the lowest since 2002, well before the 2000s debt binge reached a fever pitch. In fact, as Exhibit 3 shows, the measure has fallen below a gently upward-sloping trend line going back 50 years. If anything, it would appear that the pendulum has swung beyond equilibrium in response to the excesses of the 2000s, putting household balance sheets in excellent shape in the aggregate.

Home owners’ equity

The Financial Accounts breakdown on the household balance sheet includes one other metric that offers interesting perspective. The Fed reports owners’ equity as a percentage of total real estate holdings, essentially the inverse of an aggregate LTV measure. The historical series shows that households’ real estate position took a much wilder round trip during the housing boom/bust than the recent stock market action, but has finally returned to the pre-boom levels of around 60%. Indeed, the current reading is broadly in line with the figures recorded throughout the 1990s and into the early 2000s, before the debt-induced housing boom took off.

Exhibit 4: Household owners’ equity as a percentage of real estate holdings

Source: Federal Reserve

Conclusion

Household balance sheets were quite damaged by the debt binge undertaken in the 2000s. It took a number of years after the Crisis for them to heal, but as we examine the landscape in 2019, household balance sheets are in an unusually strong position, especially for this stage of the business cycle. If the economy turns down, as many market participants have begun to anticipate, it will certainly not be because the consumer is overextended.

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