Each quarter the Federal Reserve releases statistics on the overall wealth of American households. This most recent report, which was released last week for the second quarter of 2014, shows that a new high in wealth was reached. However, if one adjusts for inflation and population growth wealth per person was a little higher at the end 2006.
For those who are unfamiliar with the concept of wealth, it is essentially the difference between what you have versus what you owe. Income, on the other hand, reflects the amount of money that you have coming in.
Generally people who have high incomes have more wealth. However, that is not always the case, as some people with high incomes might spend everything they make. Likewise people of moderate incomes who are diligent savers can accumulate significant wealth over time.
For younger adults income tends to be more significant versus wealth. Those with student loans may even have a net worth that is negative for a period of time. Younger people do possess human capital, which reflects knowledge gained that will enhance future income. However, the value of human capital is not reflected in the Federal Reserve wealth data.
For older people wealth tends to be more significant relative to income. Many retirees in our area have achieved significant wealth through their homes. In addition older people have had the time to accumulate significant assets through an IRA or 401K plan. Some retirees may still have significant income, if they are recipients of pensions.
The categories of wealth are broken down between financial and non-financial assets. Real estate dominates non-financial assets, though cars are also included in that category. Financial assets include pensions, stocks, bonds, bank accounts, and businesses owned. What might be surprising for many is that financial assets are significantly greater relative to real estate.
There are two reasons that account for this. The wealth in this country is held disproportionately by the very rich who tend to have more financial assets relative to real estate when compared to middle income people. The other is that these figures are national, so people in coastal California tend to have much more wealth in real estate relative to the rest of the country.
The increases in wealth have tended to be driven more by the stock market versus real estate. The stock market today is more than 25% higher than the peak reached in 2007, while nationally real estate is still lower than it was during the prior peak. Even in our local area, while prices in West Los Angeles/Culver City are hitting new highs, Los Angeles County overall is still below the 2006/2007 high.
The other side of wealth is liabilities, or what people owe, and that has been growing recently. Most of that growth has been in consumer debt, with student loans growing the fastest. Auto loans and credit card loans have also increased, though at a slower pace. However, mortgage lending barely grew over the past quarter. With real estate prices rising this means homeowners’ equity is increasing.
One interesting dynamic is that people in their 20’s and 30’s are purchasing homes at a later age than previously. This is due in part to the large amount of student loans that many younger people have, and helps to explain the relatively slow growth in real estate lending.
The recent increases in wealth are good for the economy overall. Clearly those who are homeowners and/or have retirement accounts that have at least some money invested in stocks are benefiting. Younger people are generally not seeing the same gains relative to older adults, though eventually their situation should improve.