Decline In Household Net Worth Still Follows $8-Trillion Constant

As I noted briefly yesterday, the Federal Reserve's Flow of Funds report for the third quarter [pdf] came out last week, and showed a stunning but not unprecedented 4.1 percent drop in the total wealth of Americans between the second and third quarters. 

Even more striking is that this was the second quarter in a row of lost household net worth, which had been growing sporadically since hitting a trough in the beginning of 2009. If you factor in actual devaluation of the dollar and backfill inflation for the peak figure reached in the third quarter 2007, however, you get back to a phenomenon I have been tracking for several years– household net worth has basically been moving sideways since the real estate correction began. 

I used to have a teacher who claimed you could get at least a B-minus on a history assignment if you started it out by saying, "It was a time of transition; traditional values were being called into question; and the middle class was on the rise" – the idea being that these high-minded phrases were applicable to virtually every historical period. 

Something similar is going on with household net worth, which always stays the same distance from the 2007 peak no matter which way the numbers move. From a previous post by me:

"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."

True to form, the current Flow of Funds report indicates that household net worth peaked at $65.1 trillion in 2007. This fall it dropped to $57.4 trillion. That leaves us $7.7 trillion below the peak, and right where we were on the road to nowhere. 

Note that the original Q3 2007 report [pdf] only had household net worth at $58.6 trillion, which would put us only $1.2 trillion off the peak. These data get revised as better numbers come in and older figures get adjusted for inflation, but even so, adding $6.5 trillion to the 2007 figure since the original report is significant: an inflation of 11 percent over four years. That's far beyond standard inflation adjustment, which has been about 5 percent over that period and would put the Q3 2007 figure at only $61.5 trillion. Where did the remaining $3.6 trillion come from? 

Just pointing that out on the eve of a substantial revision from the National Association of Realtors – the only organization less credible than the Fed – that is expected to reveal existing home sales from 2007 on were much lower than the NAR previously claimed. 

There's one piece of potential good news in the current report. The equity portion of U.S. real estate has increased by nearly two percentage points – to 43.5 percent – in the last year. The equity portion, which measures how much of your house you actually own rather than owing, has been falling for decades. 

But the trend has reversed in the last year. We're now looking at four straight quarters during which the equity percentage increased and the mortgage percentage decreased. (Check my math: I'm subtracting item L.218, "Home Mortgages," from "real estate" under item B.100, "Balance Sheet of Households and Nonprofit Organizations".) Since there are few or no regions of the country where this positive trend can be explained by inflation of real estate prices, this looks like a return to thrift and winnowing of bad debtors. 

The appealing thing about this deleveraging is that it thwarts all the plans of the inflationary elite. But it's incredibly painful to be paying down the debt on a real asset whose market price continues to fall. Getting into a better equity position may be good for you or your heirs over the long term that exists everywhere except in Keynesian theory. But it stinks like foot and ass when you're going through it.