Household Net Worth: The "Real" Story
Note from dshort: With last week's release of the Federal Reserve's Z.1. Financial Accounts of the United States for Q4 2013, I 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 45.2% above the 2009 trough at a new all-time high 17.8% above the 2007 peak. The nominal Q4 net worth is up 3.8% from the previous quarter and up 13.8% year over year.
But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 7699%. 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 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. From that quarter to the latest data point, net worth initially trended at about the same growth rate as the overall regression but has improved over the last five quarters. We are currently 0.6% above the regression.
Net Worth Per Capita
The next chart gives us a more intuitive sense of real net worth. Here I've divided the inflation-adjusted series above by the Bureau of Commerce's mid-month population estimates, which have been recorded since January 1959.
I say "more intuitive" because the per-capita adjustment brings the latest data point from the Multi-Trillion stratosphere to $25,418 -- an amount we can relate to on a personal level. At the end of 2013, we're $587 below the real peak in Q1 2007.
Note: I've referred to this data series as "household" net worth. But, as I 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. I've seen estimates that the nonprofit component is around six percent of the total net worth.
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, 4, and 5). In the latest report, nonprofit organizations account for 6.3% of combined household and nonprofit real estate (unchanged from last quarter). That percentage in the quarterly data has ranged from a high of 9.2% in Q4 1974 to a low of 4.5% in Q3 1996.