INSIGHTS

On September 23, 2019

AAM Viewpoints – U.S. Households: Taking it to the House

The Fed Flow of Funds report was released on Friday, giving us a comprehensive snapshot of the U.S. economy on multiple fronts. Due to the immense amount of data provided, it is released on a quarter lag. We monitor this report closely for larger trends in leverage or liquidity needs for corporations and households to ascertain where vulnerabilities and opportunities might exist. The report provided a continuation of many of the conclusions we have detailed over the years.

First, the net worth of the U.S. Household increased to $113.46 trillion. On top of that, the total cash and cash equivalents attributed to Households moved up to $13.15 trillion. To even remotely understand this amount of growth, consider the growth over the last 30 years.

Over the longer term, the net worth has increased at just over 7% annually. This is important to understand on a macro front and has immense implications to the financial services industry over the next three decades. The common narrative accepted is that $30 trillion of wealth will be transferred over the next 30 years. If we project the wealth growth rate at a slightly more conservative 6%, the Household net worth in 2050 would be just shy of $650 trillion. I would argue that instead of $30 trillion transferring, it may be closer to five-fold that number, with the greatest of that amount coming at the end of the 2050.

This has severe ramifications for wealth management structures, sales and support of these assets, scalability and many other challenges. It will also have substantial implications on the next generation and the vocations chosen and the shift of labor relations from past tolerable negotiations for compensation and environment to outright appeasement to attract and retain top talent. Productivity gains will be far more important than what we have witnessed in the last 40 years. Those successful practices will be focusing on legacy transfers now to reduce the desperation that may come when a wealth manager has grown 10-fold when they expected to double.

On the asset and debt front, the following are most intriguing:

• Households and non-profits have increased Treasury securities to $2.017 trillion from a low of $122 billion held in June 2007. In just five years, this has increased by 208%.


• Total debt has increased to $16.208 trillion. Since the beginning of the Great Recession in December 2007 this total debt has increased 11.54%, or 0.95% annually. Total assets that stand at just under $130 trillion have increased 52% or just under 4% annually since December 2007. There are 8x as many assets as liabilities – a level not seen since 1984 and the 10-year Treasury was at just under 14%. That 14% would have skewed the amount of debt an individual would have taken on and manipulated the ratio to the heights it was as compared to a 1.77% 10-year Treasury now.


• Households have also reached 64.22% equity in real estate holdings from the 2012 low of 45.79%. It took several years from the crash of the U.S. housing market to hit a bottom in the amount of equity held by households. The level now is almost exactly what the percent of equity held by households that existed the 30 years prior to the Great Recession.

It is a good reminder to see just how seminal the housing crash was and why it has had such a profound and lasting impact on builders and homeowners today. The graph below shows the amount of owner’s equity households have in nominal dollar terms.

Though there are certain regional markets that are struggling a bit, overall the housing market is strong and the prospects continue to look positive moving forward, in our opinion. The common narrative is that as interest rates decline, housing does well in that the affordability index provides a stronger market.

The total amount of real estate assets (not taking out what is owed) held now stands at $32.67 trillion. Since 1982 – the peak of interest rates to look at the long secular bull market in rates as a back drop – the average increase in total real estate assets owned has increased an average of just under 6.00% annually. If we take the four periods of the Federal Reserve increasing rates (stronger economy, Fed raising rates), the average increase in the total real estate holdings increased almost 12% per year. While many think the shift of the Federal Reserve raising rates down the road will have a negative move to real estate, history doesn’t back that up.

What we see in real estate is a large amount of under building since the Great Recession ended. From 1959 to 2009, the amount of new housing starts minus the new household formations showed an overbuilding of nearly 27 million homes. This does not consider that some old homes were town down, however, in totality there were far more homes built than new household formations. If you look though at the end of the Great Recession in June 2009, you see that we have created 2.6 million more new households than new homes started. So, while we may have been overbuilding leading up to the Great Recession, we have underbuilding since the end of the recession and this bodes well for housing moving forward, though it doesn’t mean that some stagnant growth periods may occur along the way. Overall, a stronger household balance sheet, increased assets growing at a near 4:1 ratio, strong consumption and a tight labor market with an underestimated housing market appears to be a good sign for the U.S. economy and the consumer in the near term.

 CRN: 2019-0912-7665R