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Opinion: Opinion: Household wealth falls by $13.5 trillion, second worst drop in history


American households lost about $6.8 trillion in wealth in the first three quarters of 2022 due to the stock market
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has dropped more than 25% of its value, the Federal Reserve reported on Friday in the government’s quarterly report. financial accounts.

Nominal net worth fell 4.6% to $143.3 trillion as the market value of assets fell by $6 trillion and liabilities increased by about $900 billion. Household balance sheets are supported by a 10% increase in home equity, which is the largest source of wealth for most American families.

But the loss in real wealth from January to September was twice as large — $13.5 trillion in current dollars — after accounting for the rapid inflation experienced this year. Inflation makes both debt and liability less valuable in terms of purchasing power.

The 8.6% decline in real assets over three quarters is the second fastest on record (data series begins in 1959). The only larger drop was after the 2008-09 financial crisis. (The wealth lost during the Great Depression of the 1930s would probably hold the record if we had the data.)

Healthy balance sheet – current

Even after adjusting for inflation, real household wealth is still about 10% higher than at the end of 2019, just before the COVID-19 pandemic broke out.

Household balance sheets – overall – remain in excellent shape despite losses on Wall Street and a decline in purchasing power. The ratio of wealth to personal disposable income annually (after taxes) fell slightly to 769%, not far from the record 825% in the first quarter of the year.

At $18.8 trillion, liabilities are just 103% of annual disposable income, far below the 136% peak seen in 2008, right when the housing bubble burst. In fact, debt is lower today than it used to be, despite the much larger economy.

Homeowners in particular were in good financial shape as September ended, with equity in their homes rising to a near-record 70.5% market value from a record low of 46 % in 2012. But if home prices continue to fall as they have in the past few months, homeowners with little exposure to the stock market will start to feel poorer. What will happen to home prices when mortgage rates rise is a big unknown facing policymakers and homeowners alike.

Take on more debt

Warning signs are also flashing as household debt has awakened, like Rip Van Winkle, after 10 years of slumber. After a decade of flat debt in inflation-adjusted terms, real household debt increased at an annualized rate of 4.3% in the third quarter, the fastest increase since 2007.

Consumers are taking on debt or withdrawing their savings to maintain their standard of living. By a measure highlighted in this Fed report, the personal savings rate has fallen to 3.7% of disposable income, after averaging more than 10% over the past 10 years.

Overall, however, households still have plenty of cash available. Bank accounts and money market funds remain abound with more than $18 trillion in relatively liquid deposits. That’s almost enough to pay off every penny of debt that households own.

But of course, people with debt and people with millions of dollars in the bank are not the same.

The Fed will report additional details on financial accounts next week, including the distribution of assets and liabilities by different groups, such as age, race, education, income. and wealth. But even Fed economists have doubts about the accuracy of those distributions, because the pandemic has disrupted everything.

Follow the money, if you can

One of the biggest unknowns in today’s economy is how much money the typical family would have to put into savings if it were to be more difficult. Under one set of assumptions, a typical family in the bottom half of the wealth chart has about $10,000 in cash equivalents. That doesn’t pass the smell test for me, considering how many people live on paychecks. But who knows?

We may not know who actually holds all that cash until more precise data from the Fed’s Survey of Consumer Finances, conducted every three years, is released next year. .

I hope families are indeed resilient enough to maintain their standard of living even as the Fed continues its efforts to reduce their spending to bring inflation back to an appropriate level. If ordinary families tighten their belts too much, a recession that kills jobs and wealth is inevitable.

Rex Nutting is a columnist for MarketWatch who has been writing about the economy for over 25 years.

More on wealth and inflation

Higher wages are good news for working families in America. Why does it panic the Fed?

Americans are feeling poorer for good reason: Household wealth is being slashed by inflation and rising interest rates

Why are Americans so grumpy about the economy? Never before have they lost so much purchasing power in a year, when the stimulus is exhausted and inflation is high

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