One concept that has gotten a lot of attention the last few months is the household balance sheet: the relationship between household assets and liabilities, and what that means for household behavior (consumption versus saving). Though not the precipitating factor in the current crisis, the weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP. The Federal Reserve recently released a snapshot of the household balance sheet in its triennial Survey of Consumer Finances, so we can see what the situation looks like in some detail. The survey was actually taking in 2007, but with a few adjustments we can see what the current balance sheet looks like.
On the headline level, median income fell from $47,500 to $47,300 (all figures are in constant 2007 dollars), while median net worth (assets minus liabilities) grew from $102,200 to $120,300. No surprise there: we already knew wages stagnated, while real estate and stocks appreciated. However, since the survey was conducted in 2007, median net worth fell by 17.8% according to the Fed estimate, to $99,300, and that’s just to October 2008. Given that the cumulative returns of the stock market have been about -15% since October 31, and that housing prices have fallen as well (and the Fed used a housing index that has fallen less than the Case-Shiller index*), that net worth is probably between $90,000 and $95,000 – significantly less than in 2004, and back around 1998 levels ($91,300).
I wanted to come up with a composite picture of the median family, to see how they are doing. This is actually impossible to do precisely, because of the way the survey data are presented in the report: for each category of assets (or liabilities), they say what percentage of families (in each income quintile) have that asset, and then the median value owned among families that have that asset.** So I came up with the following compromise: for each asset or liability, I include it if more than 50% of the families in the middle income quintile have it; in that case, I record the median amount held by families who hold that asset. This isn’t the median family, but we might call it a “typical” family. (If you didn’t follow this, don’t worry about it.)
The picture I get, with some basic assumptions,*** looks like this:
|Mortgage on primary residence||84,800||88,700||88,700|
The picture you get is surprising. From 2004 to 2007, the typical family only took on $4,900 more debt – mainly in mortgages, but some for installment loans (primarily for cars and education) – but its assets grew by slightly more, a little bit because of home values but more because of increased retirement savings, presumably due to the rise in the stock market. (For those wondering at that small increase in home values: the median value of all homes increased from $175,000 to $200,000, but the median homeowner is not in the 50th percentile in income; he or she is somewhere in the 60-80th percentile range, so he has a more expensive house than the typical family.) In this picture, the typical family looks reasonably prudent, although taking on 4% more debt with no increase in income is not necessarily recommended.
When the crisis hit, though, the typical family took large hits in retirement savings and in home equity that cost over one-third of its net worth. So even though the typical household still has the jobs it had before the crisis (unemployment is still “only” 7.6%), it is much more worried about saving for whatever it has to save for – college tuition, retirement, etc. – and hence much less willing to spring for the proverbial flat-screen TV.
(Bear in mind that this picture tells us nothing about the foreclosure crisis, since the typical mortgage holder is not delinquent at this point. The foreclosure crisis and its impact on mortgage-backed securities is about the ability of problems at the margins to have severe impacts on certain kinds of securities and the institutions that hold them.)
At the end of the day, I think we knew all this already. But seeing it in numbers does help illustrate the crisis from the household perspective.
* The Fed used the state-level purchase-only Loan-Performance Home Price Index, from which they derive a decline in value of 9.2% from the survey date (sometime in 2007) until 10/31/08. By contrast, the Case-Shiller Composite 20 fell by 14.5% from December 2007 to October 2008, and 16.4% from December 2007 to November 2008. Since inflation was positive during this period, the real fall in the Case-Shiller index was even greater.
** For example, of families in the middle income quintile (40th to 60th percentile), 71.6% own their primary residence, and of those the median house value in 2007 was $148,300 – but that’s just the median value for the 71.6%, not for all 100%.
*** For 2009, retirement savings reduced by 25% (stock market is down ~45%), housing by 16.4% (from Case-Shiller), other values the same as in 2007.
Update: Tom Cunningham did some similar calculations using the data from the Survey of Consumer Finances, and he finds that households in the 50-75th percentiles by net worth (not income, which I used) have seen a 29% fall in their net worth, which is similar to what I got. He also finds that on a percentage basis, the richest households have suffered the least (primarily, I believe, because they are more diversified and have less leverage, which is what really hurts you when asset prices fall).