Magazine article Economic Trends

Household Wealth and Consumption

Magazine article Economic Trends

Household Wealth and Consumption

Article excerpt

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03.22.07

As if you haven't had to digest enough troublesome tales from the housing market, along comes the Federal Reserve System's Board of Governors with news that owners' equity as a percentage of the total value of residential real estate hit an all-time low of 53.1 percent in the fourth quarter of last year.

Simply looking at the picture demonstrates the problem with malting too much out of that statistic: Most quarters bring a new low in owners' equity share. The same issue arises if we view the flip side of household balance sheets and look at household debt as a percentage of disposable income.

Although there is surely a limit on the level of debt that can be sustained relative to income, we have apparently not yet found that limit. What's more, total household net worth as a percent of disposable income continues to expand from its post-1991 recession low and is at historically high levels. Not everyone, however, will be impressed by that net worth statistic. As the experience of the late 1990s demonstrated, the net worth picture can change rapidly when the bottom falls out of an asset boom. And there is little doubt that the importance of housing investments in household balance sheets has increased over the past several years, on both the asset and liability side.

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In the face of sharply declining rates of housing price appreciation, these balance sheet developments are generating no shortage of concern about the financial health of U. …

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