Flow of Funds Q4: A Poorer, Wiser America

The Federal Reserve's Flow of Funds report [pdf] for the fourth quarter of 2010 shows Americans running full speed just to get back to a circa-2006 level of wealth.

We're down somewhere between $5.44 trillion and $7.35 trillion from the peak of household net worth in the third quarter of 2007. Household net worth was $56.8 trillion at the end of the fourth quarter of 2010. The historical information in the current report says we peaked at $64.2 trillion in 2007. That's quite a bit more than the household net worth number of $58.6 trillion in the original Q3 2007 report [pdf]. (Presumably the figure was corrected as additional data became available.) Putting that $58.6 trillion through this CPI inflation calculator, we get $62.24 trillion in 2011 dollars.

Since the household net worth figure is down in large part because of deflation of assets—real estate primarily—dollar inflation may not be applicable. And at this point it's an open question whether CPI and CPE are designed to give accurate measures of the value of a dollar or to bamboozle dollar users into thinking they have more financial power than they actually have. In any event, even if you leave the figures unadjusted, that means the best case is that we're $1.8 trillion poorer than we were at the peak; the inflation adjusted case is that we're $5.44 trillion poorer, and the case that uses the most up to date Fed numbers is that we're $7.35 trillion poorer.

Note that Calculated Risk says the peak was $65.7 trillion, and dates the peak to the second quarter [pdf] of 2007. I don't see where those numbers are coming from, nor how CR gets that as a decline of $8.8 trillion rather than $8.9 trillion. But when I reach a different conclusion than Calculated Risk I generally assume my conclusion must be wrong. So it's possible that we're down almost $9 trillion from the middle of 2007.

For some time now I have been tracking the question of how much value the private sector has lost since the peak. The interesting thing is that since the trough of household net worth in the first quarter of 2009 ($17 trillion off the peak), we have not come close to returning to pre-recession levels of wealth. In fact, the thumbnail that we're now $5 or $8 trillion off the peak recurs in quarter after quarter. It's like one of Zeno's paradoxes or a going-out-of-business sale at an Oriental rug store. We're always $5 to $8 trillion away from the return of the good times.

Just about $7 trillion of the total loss has been in real estate, which carried a dollar price tag of $25.27 trillion in 2006 and just $18.26 trillion at the end of 2010. Strangely, while the total value of real estate dropped from Q3 to Q4 (as it has in most quarters since 2006), the equity portion of real estate ownership increased by 0.1 percent. Americans now own a shade above 42 percent of their homes. Mortgage cramdowns could potentially have accounted for some of this uptick, but in a curious development, it turns out the HAMP has spent only a small fraction of its total earmark. So if banks are increasing principal reduction loan workouts, they seem to be doing it with their own dollars. (Satan knows they've got plenty of those.) In any event this is good news for the solvency of owners and for general plain dealing. The equity portion has been going down more or less steadily since the 1950s, when Americans owned nearly 80 percent of their homes. That trend can't be reversed when house prices are in a structural decline, but it will have to be reversed someday.