Tracking the Household Balance Sheet

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:

2004 2007 2009
Income 47,500 47,300 47,300
Bank accounts 3,300 2,700 2,700
Retirement savings 19,000 23,900 17,900
Vehicles 14,400 14,600 14,600
Primary residence 148,300 150,000 125,400
Total assets 185,000 191,200 160,600
Mortgage on primary residence 84,800 88,700 88,700
Installment loans 11,800 12,800 12,800
Credit cards 2,400 2,400 2,400
Total liabilities 99,000 103,900 103,900
Net worth 86,000 87,300 56,700

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).

30 thoughts on “Tracking the Household Balance Sheet

  1. To answer my own question:
    “Feb. 9 (Bloomberg) — The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.”

    Using the 2007 estimate of 111162259 households, the bailouts add to $87,300 per household. So the typical family paid 100% of its 2007 wealth, or 154% of its current net worth to backstop the banksters.

    No wonder the calls to Congress were hundreds to one against TARP.

  2. I agree with the general point that bailout money has not flowed directly to households, and not much has flowed indirectly, either. However, the $9.7 trillion is not a handout. Most of it represents contingent liabilities taken on by the Federal Reserve, such as commitments to buy certain kinds of securities. These contingent liabilities may or may not turn into actual losses. Some are certain to involve losses – for example, both the CBO and the Congressional Oversight Panel have estimated that about 20-30% of TARP money is subsidy. But some are unlikely to involve large losses, like the guarantee on money market funds. So net taxpayer losses, while large, should be far less than $9 trillion.

  3. dis ezeey. giv $9.7 billyun to all kittehz and den put contingint libiliteez in TrAsh ! ! Lol Lol mew

  4. Looking at the above representation of the medium household balance sheet, it does not necessarily represents the “misery” that is prevalent and pervasive at the lower segment of the income ladder.

    The “medium” indication is insolvency at another 20%-30% decline in property value. However, at that threshold we must assume an absolute compulsion on the part of the people standing on the lower section of the economic ladder to wipe out current economic model and rather take up chaos as a means to survive.

  5. I’ve charted our household net worth since 1998. What I see now is that it has returned to almost but not quite as low as pre-W. levels, after a steep incline and decline.

    Does this mean we can just write off the last 8 years and pretend they didn’t exist – the torture, wars, lying, division of our country, and so forth? Are we worse off after these people have ruined our economy? Fortunately we had 1 house and 1 credit card before the rule of the unlawful began. Those who weren’t there yet are the ones suffering now.

  6. This portrays with numbers what is the inverse of the “Wealth Effect”: a reduction in net wealth that leads to a negative reaction to debt, also known as that old fashion habit called savings. But because we have let our economy become 60-70% dependant on consumption, savings won’t stop the financial waves crashing on our shores.

    Every 60 to 70 years, our country goes through a financial tsunami like what we are experiencing… I beleive it correlates to the generation that last experienced the pain (my depression-era parents) coming out of power, and their why-bother-saving-when-you-can-borrow children living beyond our means.

    Too bad my kids are going to grow up in an era where they will have little chance to improve thier standard of living relative to their parents. We will teach them some hard lessons, ones that their grandparents already learned, but with a strong chance that we will have already transitioned from The End Of The American Century to that of The Rising Sun.

  7. We are witnessing the collapse of the industrial hierarchy and it is taking the financial intermediaries with it. This process actually began when we crossed a great divide in the 1970s when Moore’s law took effect and disruptive technologies laid the groundwork for the manifestation of present symptoms. This is not your mother’s typical business cycle, but is an irreversible transformation. The government can put the defibrillation paddles on the comatose patient and then inject adrenaline all it wants. It will still be on life support and nearly brain dead when its revived. In the very long run this will be chrysalis. The never-ending caterpillar who has no purpose in life but to eat and shit will go into a cocoon and be transformed biologically and chemically. A butterfly will emerge. In the meantime, lots of parasites on Wall Street will have to learn how to grow food. The new order will have little room for the financial intermediaries of the old order and even less room for a bunch of attornies to lord over us. Rage against the Machine!!

  8. I don’t get it. Why pay attention to this report when you have the quarterly updated Fed flow of funds report?

    And the average (not median) net household worth is far higher than these numbers suggest, according to the quarterly stats.

  9. Hummmm—-Thanks for compiling that kind of data. However, my instincts keep telling me that we still have more to study. This economy was built on a house of cards with too much production outsourced. Consequently the financial institutions never had a foundation except for a fake bubble. Now, we have to almost rebuild from scratch. Consequently, many households feel the impact of an uncertain future.

    One curiosity is how much upward mobility is left for people in this economy, especially for the young people and hourly workers.

    Also, I live in Charlottesville, Virginia where the fraternity and sorority cultural appearances pervade. Even though we possess one of the top 10 per capita incomes in the country, 47% of the people cannot afford housing, health care and food all at the same time. Nearly half of the people never did have assets.

    I wonder about how among hourly workers, the real incomes are declining, but they try to maintain their same standard of living and appearances by using second and third bubble mortgages.

    Then, there are the common questions about how accurate the unemployment statistics are. Also, how many people are underemployed and do not perceive of any better opportunities except through luck. They do not have the inside contacts to obtain anything better.

    With these thoughts in mind, would it be helpful to take a closer look at different parts of the country, and take a really close look at any division of wealth within localities?

    Bob Spencer

  10. Good analysis. Basically, the “median” household still with a job has liabilities match up with Assets – car to car loan, bank account to basic bills due – no retirement to speak of and no emergency savings. All of the margin is “in the house” which you can’t access because home equity lines have been cut. So on a liquidity basis, the median household has no margin for any event such as job loss or health care. The wolf is at the door.

  11. Another way to look at the issue (similar to what Bob did in his post above) is that for the past several years our increased purchasing ability comes not from increased earning power, but inflated asset values. Debt and income were relatively stable (and I hazard that if we look back 10 years on that chart we’ll see the only significant increases were a linear correlation between debt and assets), but the value of our assets fell.

    There’s 3 ways to rebalance the chart and recover our missing net worth: increase earning power (which cost cutting and productivity lead to downward pressure), increase “value” of assets, or reduce our debts.

    My understanding is that the problem with the third option of reducing debts in our system is that it destroys money (fractional reserve banking). So our governments are frantically trying to recover the debt markets so that they will re-create some of the money that has gone missing. To quickly increase value of assets, we inflate our currency.

    How do we systematically increase earning power of individuals (cost-cutting, increased productivity and efficiency all exert downward pressure on income)? Businesses can’t do that by themselves and stay competitive, and with free trade the effort would need to be global (unless we replace free trade with fair trade, but then we would all be painted as protectionist).

    So do we devalue our dollar or try to raise earning power?

  12. With investments of the size of the bailout economic problems could be solved given that we did not have the political influence of finance/insurance/real estate. The Fed can establish a bureau or Fannie Mae, Freddie Mac can buy up all troubled assets at market rates via public auction. By law or administrative fiat all of the mortgages could be refinanced at 4.5% interest at current market value. Also unemployment insurance can be set to be 80% replacement rates largely meliorating the expected deflationary spiral. Insolvent banks should be closed and sold to new managers who cannot do worse than the current bankers.

    The flood of consumer savings could easily be invested long term creating more jobs given creative arrangements. For example buidlings could be retrofitted with grass to insulate and a portion of the energy savings could be passed on to the investors.

    While we know a little about economics we know almost nothing how to effect a very moribund political system. People say the US is the oldest democracy, it may be but its old age shows putting in mildly.

  13. I believe median income and assets is a better indicator than means. It is sobering to realize the number of people existing on below $47,000 a year income. The concentration of wealth in the bourgeois fat-cats who pull up the averages and obscures the problems with illiteracy and lack of upward migration. Until we solve the problems of those below the median, society will continue to want to tax the upper quartile into oblivion. Also, remember that most of the half of society below the median/mean are somebodies customers. Maybe that’s why Walmart and McDonalds are doing well and the bottom has dropped out of luxury goods.

    As for whether you should consult this website or another, that is personal preference. No one is trying to sell you anything, but I suggest that when you try to express an opinion on the Fed’s website they will tell you to buzz off.

  14. Maybe it would be interesting to look for a correlation between macroeconomic figures and household savings/spending rates over a longer span of 15-20 years during the, as they call it, Great Moderation

  15. This is very nice work. Thanks.

    I don’t think I have anything very original to add to the comments above. Teotac wrote:

    “Every 60 to 70 years, our country goes through a financial tsunami like what we are experiencing… I beleive it correlates to the generation that last experienced the pain (my depression-era parents) coming out of power, and their why-bother-saving-when-you-can-borrow children living beyond our means.”

    Some time ago, I remember reading (no idea where) that the world travels through two matching 60 year cycles, with inflation and debt spawned crises spaced out by 30 years – it takes a couple of generations for the fear of screwing up due to debt or inflation to die out. Come 2040 or thereabouts, my daughter will look at her $10 billion monthly paycheck and think “this isn’t buying as much as it used to…”

    Dave at 9:02am has it just right, “the wolf is at the door.” For families who have lived in the Warrens’ “two income trap,” the moment of truth is at hand. The median American analyzed by Professor Kwak sustained their lifestyle with a second income, credit cards and mortgage equity withdrawal. Calculated Risk rang the tocsin on MEW, a form of dis-saving. With that source of “income” switched off for decades, and unemployment biting, lots of people are going under.

  16. No need to post this message on the site.

    I think you mean “taken in 2007” when you write “taking in 2007”.

  17. I believe Kwak missed one class of asset decline. He lists vehicles as worth the same in 2009 as 2007, but used car prices have plummeted, so I think it unlikely that this item should be held fixed. OTOH, at least most car owners haven’t tried to sell lately, so psychologically they probably don’t realize this particular hit, yet.

  18. Given that the S&P 500 is now just over half of its 2007 level, I think those retirement savings estimates may actually be a bit rosy… Although, of course, I understand that households have been doing a bit of saving recently…

  19. Table 16 Amount of Debt of all families, distributed by purpose of debt, 1998-2007 surveys is telling us where the debt has been incurred. Low interest rates along with high returns on housing resulted in debt being accumulated for “Other residential property” aka speculative investment, which grew from 6.5% in 2001 to 10.8% in 2007, a change of over 4%</B?. That debt had to be unwound, putting further pressure on housing prices. It is not a paltry sum, considering that the credit card debt was only 3.5% of the debt component in 2007.

    By 2009, credit card debt, as a ratio of total debt, should increase to historic levels since households will need to pay off their speculative debt using unsecured instruments. The insolvent banks have no recourse but to offer unfavorable terms such as 25% interest rate on those loans, putting further burden on households.

  20. This analysis is based on cross-sectional data and not longitudinal data and this limits its usefulness. However, it does suggest that the wealth effect on Average Joe and his family will be relatively small. If Mr. Joe is mid-career, he views his house as shelter. His net worth has taken a beating on paper but the cost of housing his family is way down. If he moves, he will realize that loss but will spend far less to buy a comparable house in the new community. Average Joe retires on Social Security and a defined benefit pension supplemented with tax-sheltered savings and eventually the equity in his house. His small portfolio has taken a beating but from the long range point of view, this means he will have to work another 6 months or so before he retires or perhaps forgo his dream fishing boat.

    The wealth effect of the housing/equity bust is best analyzed from the standpoint of the top 20% of the workforce, especially people between ages of 50 and 70.

    As far as Average Joe is concerned, the big issue is the long term solvency of the Social Security system – specifically, the ability of the federal government to finance the draw-down of the trust fund in the capital markets. Multi-trillion dollar bailouts of Wall Street, banks, the UAW, public sector unions and foreign investors combined with long-term growth in discretionary government consumption masked as stimulus will make this very difficult. Average Joe may get the Social Security check he expects but he and his children will pay for it through much higher taxes.

  21. The portrayal of Average Joe as a guy with a defined benefit health and/or pension plan makes a lot of assumptions. Usually 70% to 80% of the populace is somewhat protected even if 25% of the Average Joes become Average Hobos. To do longitudinal trend analysis of balance sheets when pertubating and outlier events is a meaningless exercise. If this is merely your grandmother’s business cycle pendulum, soon to center itself, then that one thing. But, if it’s a discontinuity in evolution, and the dinosaurs begin collapsing in the swamp and the woolly mammoths begin to shrink, well that’s another thing. Average Joe only exists statistically based on averages, means and modes for people who do not circulate socially with a horizontal cross section of society. A convenient abstract with inconvenient truths.

  22. Your household balance sheet avoids an essential point. The asset side is largely fantasy. The actual net worth of ninety percent of the population is negative. Homeowners get to live in houses while paying rent to banks and developing fantasies of equity which can only be realized upon death since for a live person selling one house requires buying another house unless the seller wants to live in his car, and even those phantom gains depend upon a rising market. Low wages are supported by credit card usury which combines with the catastrophic cost of mostly useless higher education to produce middle class impoverishment and you cannot paper this over with meaningless statistics about median this and that. With taxes at 35% it is impossible for a middle class to save anything. Those who rise succeed by gambling on stocks but the great majority comes in too late and gets vaporized by the periodic collapses. Today the financial markets are zero sum. Executives have capitalized all the profits for their own benefit through stock options, and even before the crash buying stocks was a mug’s game. A company issues a billion shares and everyone gets excited about an earnings improvement of $.03 per share? You can watch over dressed people exchange opinions about this all day long and the amazing thing is they get paid huge sums for preparing these estimates and explaining why the earnings move up or down by $.01. Monkeys in the jungle display behavior no more senseless than this. Now that all the paper wealth is disappearing perhaps some economist will turn to getting what Veblen called the machine process functioning again.

  23. Right way to do it? Raise earning power. How to do it fast? Guaranteed minimum income or equivalent: a large-scale version of the Alaska Permanent Fund.

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