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We're getting less wealthy
Thursday, September 18, 2008
It looks like we're undergoing another one of those painful "wealth contractions" - similar to what we saw in 2001 when the last asset bubble burst. A short time ago, the Federal Reserve released their quarterly Z1 Flow of Funds Report and the news isn't good.
The value of real estate and equities owned by households has now shrunk for three consecutive quarters while traditional savings have increased modestly.
When it comes to households and their real estate assets and liabilities, the news is even worse. The home value seems to be going away much faster than the associated debt which, as of the second quarter, was still going up.
It's funny that, here in 2008, you don't hear any economists talking about how we don't need to pay attention to the pathetically low savings rate of recent years since asset prices continue to go up and we're all getting wealthier.
Maybe old fashioned savings is a good idea after all.
6 comments:
Those charts look funny to me. Everyone seems to agree (i.e., all the housing price studies) housing prices nationwide have fallen 25% or so, yet the household assets / liabilities chart shows only a 2.5% decline from the peak. Meanwhile the Household Assets chart would indicate that everyone in this country still has about 50% more wealth than in 2002 - i.e., the total wealth of this country increased by 50% during a 4 year period in which we were so unproductive that we were basically going deep into debt to foreigners. HMMMMM?????
Are these the "we're smoking crack" charts, or what?
This is not a measure of home prices, this is the total value of the nation's entire housing stock so new home construction gets added in and then home price declines have made the overall figure go down recently.
They also (somehow) cover the entire country, so their overall declines would be closer to OFHEO or NAR data than Case-Shiller. These figures are subject to revisions over the next year, so I imagine they'll be revised down.
Tim - thanks, but I don't think the OFHEO is a good measure for a number of reasons, many of which are set forth at http://calculatedrisk.blogspot.com/2008/01/house-prices-comparing-ofheo-vs-case.html , but mainly because they depart from what my two eyeballs observe and in the end that is the ultimate test of the reliability of any published data. The fed numbers are just, frankly, bull excrement.
Take a look at line 42 of the Z.1 release table B.100 - which is not included in your graphs. We are to believe that from 2002 to 2006, the "net worth" of Americans increased from $39.2 trillion to $55.9 trillion in that period, for an increase of $16.7 trillion dollars in a four-year period. Prithee do tell, what amazing acts of productivity did Americans accomplish during that 4-year period to increase their wealth by 50% over what they had spent the past 200 years accumulating?
For this exercise, I permit you to ignore the vast increase of American indebtedness to foreigners in that period (i.e., the current account deficit), which actually proves in fact that Americans became poorer during that period.
And what have Americans done so differently in the 2 years since, that wealth has actually disappeared instead of increasing at that astronomical rate?
Any even superficial analysis shows this data is just made-up fantasy numbers that have no bearing whatsoever to reality. As Mark Twain once famously quoted, "There are three kinds of lies: lies, damned lies, and statistics."
And I will actually explain how these fantasy numbers cam to be. There was an illusion of wealth created by giving free money (though absurd lending standards) to some small percent of the population which sold their homes, and reasoning from that (in the most stupid way) that all homes were worth more (as if free money could be given to every homeowner without causing massive inflation), while only counting on the liability side the additional debt of these few homes which had actually traded at the unrealistic, funny-money prices. I would refer to this as some gigantic financial fraud.
Now in my opinion it is irresponsible to publish this financial fraud as if it represented reality. (Not meaning to criticize you Tim, I think you do a fantastic job with this site :-))
I don't know... it doesn't look that bad to me. If you look at the Z1 data between end-2002 and Q2-2008, it says assets went up about $22 trillion and liabilities went up about $8 trillion.
Of the $22 trillion increase, real estate accounted for about $7 billion, up 50 percent over that period. This is about consistent with the Case-Shiller HPI - prices are still up significantly from end-2002.
The other $15 billion increase was in pension funds and stocks, which also makes sense because the DOW was only at about 8,500 at the end of 2002. At the end of June it wsa up almost 50 percent to 12,500.
Well Tim the fact is housing values have not increased 50% since 2002. In fact housing values pretty much haven't changed. What did change is underwriting standards which created a housing bubble. And I would think that you are wise enough, not to confuse a bubble, with value. Value has to be created through productive forces - bubbles are created through financial machinations. One is real, the other is an illusion.
So if you want to say, the illusion of wealth went up 50%, I'd be with you. But if you want to say wealth went up 50%, I would say, you need to read your site a bit more ;-).
Then as I noted there is another misleading factor that makes this data unreliable. And that is that prices went up through greatly increased leveraging. That is, the debtload on each house whose price increased, to set the price per average house, increased dramatically. Houses that weren't sold also had their debtload increase - the ATM syndrome. But less so. Yet the methodology indicates all houses have increased value, but only some have increased debt (the ones that in fact sold). Thus, the increased debt only reflects the houses that have sold, whereas the increased valuation is applied to all homes. That is an inconsistent methodology: the increase in the debt was a necessary factor in the higher selling price, yet the methodology applies the higher price to each home without considering the increased debt (this may make sense on the micro level but not on the macro level, since it is a zero-sum game, as opposed to value creation, which does have gain in it). (Certainly some new homes were built and home equity withdrawals were used in renovations, but this did not come anywhere near a 50% increase in housing wealth.)
In terms of the 50% increase in financial assets from 2002 to 2006 (as in table L.100), frankly, I have no idea how they calculate this data. I suppose all that is highly concentrated in the hands of a few, other than the pension funds.
I think that the larger point is being missed. Real per capita household net worth has declined since March 2000.
Nominal household net worth has increased from $43.329 trillion in Q1.00 to $55.993 trillion in Q2.08, which is an increase of 29%.
The CPI has increased in the same time period by 29% and, of course, population has increased by about 1% per year or ~8.5%.
It is a poor showing for what is arguably close to a peak to peak business cycle.
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