Household Net Worth: The "Real" Story
December 10, 2015
by Doug Short
Note: With today's release of the Federal Reserve's Z.1. Financial Accounts of the United States for Q3 2015, we have updated this commentary to incorporate the latest data.
Let's take a long-term view of household net worth from the latest Z.1 release. A quick glance at the complete data series shows a distinct bubble in net worth that peaked in Q4 2007 with a trough in Q1 2009, the same quarter the stock market bottomed. The latest Fed balance sheet shows a total net worth that is 55.1% above the 2009 trough and 25.9% above the 2007 peak but off the all-time high set in Q2. The nominal Q3 net worth is down 1.4% from the previous quarter but up 2.9% year over year.
But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 8137%. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.
But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew over seven-thousand-plus percent, the value of the 1950 dollar shrank to about nine cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is a log scale chart adjusted for inflation using the Consumer Price Index.
Here is the same chart with an exponential regression through the data. The regression helps us see the twin wealth bubbles peaking in Q1 2000 and Q1 2007, the Tech and Real Estate bubbles. The trough in real household net worth was in Q1 2009. The recovery from that trough took us above the regression earlier this year, but this indicator is now fractionally below the trend.
Net Worth Per Capita
The next chart gives us a more intuitive sense of real net worth. Here we've divided the inflation-adjusted series above by the Bureau of Commerce's mid-month population estimates, which have been recorded since January 1959.
We say "more intuitive" because the per-capita adjustment brings the latest data point from the Multi-Trillion stratosphere to $264,700 — an amount we can relate to on a somewhat more personal level. The latest data point is now fractionally above the real peak in Q1 2007 but off its record high in Q1 of this year.
Note: We've referred to this data series as "household" net worth. But, as we show in the chart titles, it also includes the net worth of nonprofit organizations. The ratio of two isn't clearly defined in the Fed data, and it obviously varies by asset and liability component.
One easy (and rather illuminating) point of comparison in the Z.1 data is the relative share of real estate at market value (B.100 lines 3 and 5). In the latest report, nonprofit organizations account about 11% of combined household and nonprofit real estate). That percentage in the quarterly data has ranged from a high of 14.5% in Q4 1974 to a low of 7.8% in Q4 2003.