By Oren Laurent
President, Banc De Binary
A recently released report provided in-depth information regarding US household net worth. According to the Federal Reserve Bank, US household net worth grew by $3 trln and now sits at over $80 trln in total. This information purportedly paints a rosy picture for citizens in the US. But it begs the question: what does the data mean? The size of the number alone is immense, certainly a reason to celebrate. But once a little digging is done, the facts as they stand are perhaps less flattering. It must be said the that the US economy – the world biggest economy, and the world's richest country – is on the incline and what was a bearish market since 2008 is now showing bullish sentiment. Against the backdrop of a slow but steady recovery, the $80 trln figure certainly encourages optimism amongst investors.
Facts and figures: Breaking it all down
Almost 50% of the $80 trln figure is made up of household real estate and pension entitlements. To further elaborate, $19.4 trln is the asset value of homeownership while $19.6 trln is the value of pension entitlements. The latter category is more complicated in that it includes multiple facets. Pension entitlements encompass private pensions, government pension entitlements and IRAs. The values of these respective investments are: $4.9 trln for 401(k) plans, $3.1 trln in private pension plans, $8.5 trln in government pensions and $5.7 trln in IRAs.
The figures are certainly impressive however it's important to note that savings for non-government employees are only $4.9 trln as compared to $8.5 trln in government pensions. This is further exacerbated by the fact that government workers comprise just 14% of the US workforce. The combined value of IRAs and 401(k)s is $10.6 trln – 24.7% more than the $8.5 trln in government pensions. Consider the fact that some of those IRAs include public-sector employees too. The fact of the matter is that savings by private citizens are considerably lower than one might expect, and the role of government is increasing. It appears that in spite of these impressive figures, the average American is not quite saving as much as is required.
Homeownership under the spotlight
As alluded to earlier, the Federal Reserve Bank announced that $19.4 trln of the $80 trln is homeownership. This figure does not reflect the total value of private home ownership; it lists the mortgage values of homeownership. This is to say that it does not differentiate between 10% homeownership or 100% homeownership – the figure of $19.4 trln is a blanket figure. If we in fact deduct the value of mortgages, the total home equity in the economy is $10 trln. Americans who are actually homeowners are not the up and coming young professionals, they are middle-aged folks or retired folks. Viewed in perspective, it is clear that the actual wealth of Americans is less obvious. A study was conducted of the median household net worth between 2000 and 2011. Between 2000 and 2004 the median net worth hovered between $80,000 and $90,000 per household. If we exclude home equity, the median net worth between 2000 and 2004 dropped from approximately $21,000 to under $20,000 in the same period. A similar trend can be seen between 2005 and 2011 in both instances.
The debate still rages about the benefits of homeownership as opposed to renting in America. The general consensus is that equity cannot be generated through rental and therefore homeownership is a safer alternative. Rentals that are paid to landlords tend to enrich the landlords while only providing housing to the tenants – nothing more and nothing less. Of course there is greater responsibility incumbent on homeowners in the form of property taxes, maintenance and other obligations. Homeowners are also tied to a specific location which may present a problem in an unstable economic climate. Thus the benefits and pitfalls of renting versus owning continue to play out in an economy that seems to be bullish for the time being.
Analysts are quick to point out that homeownership does provide a possibility for wealth generation in the short term, since property prices tend to rise at a rate that is beneficial to the homeowner in the short term. In the long term, other investments (mutual funds, index funds) and salaries tend to outstrip the growth in property prices, therefore downplaying these assets as income generating possibilities. Homeowners also have the opportunity of subletting as a form of income generation, while still owning the asset and enjoying reduced costs. The benefit of homeownership goes beyond economic components in the sense that communities are actually created among homeowners. Rentals tend to get tenants on a short-term basis while homeownership is definitely a long-term deal. The jury is out on what all the data means, but it is encouraging nonetheless.
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