By Scott Hoyt – Moody’s Analytics
U.S. household wealth has changed little over the last two years. In the middle of last year, it finally, if barely, rose above the peak it hit in the first quarter of 2023. It retreated from that level in the third quarter.
Given stock market gains and some modest gains in house prices in the final quarter of 2023, year-end data to be released in March will likely show wealth rising enough to hit a new high, though prospects for further growth are modest at best.
At an aggregate level, wealth in the data declined slightly from its early-2023 peak in the year and a half through the third quarter.
More broadly, it is likely that coming data will show that wealth rose only slightly from the end of 2021 to the end of 2023. This lack of growth over the last two years comes in sharp contrast to the surge in wealth that accompanied the economic reopening following the pandemic.
Wealth grew 30% from the end of 2019 until it reached its peak in early 2022, among the largest increases over a comparable period on record.
The movements in wealth have not been even across the income distribution. Gains in wealth during the post-pandemic surge were led by lower income groups, with faster growth in each of the quintiles in the bottom 60% of the income distribution than any of the reported groups in the top 40%, although within those groups there was no rank ordering.
Over the year and a half from the first quarter of 2022 until the third quarter of 2023, growth in wealth nearly rank ordered by income, but with the fastest growth at the bottom of the income distribution and the largest declines at the top of the income distribution.
Overall, inequality in wealth holdings appears to have diminished over the past few years. There are several factors that appear to have contributed to this shift. One is the rapid growth of house prices. While gains in real estate equity as a share of wealth do not always reduce inequality, it clearly can and seems to have over the past few years.
With nearly two thirds of households owning homes, rising house prices directly benefit far more households than rising stock prices.
Other holdings
Further, and perhaps more surprisingly, even though few low-income households own homes, the holdings of other assets by those households are so small that real estate equity accounts for a larger share of wealth at the bottom of the income distribution than for higher-income households.
The surge in house prices following the pandemic lifted the share of wealth accounted for by real estate equity for all households.
Not surprisingly, the biggest gains were in the middle of the income distribution where homeownership is common, and homes tend to be the primary asset on household balance sheets. For lower-income households, there are many fewer homeowners and for higher-income households, stocks, small businesses and other assets absorb a larger share of household assets.
These shifts may not be sustained. House prices are significantly overvalued. It is unclear if prices will decline to restore equilibrium or just grow slowly if at all for more than a few years. Either way, homeowners’ equity will likely fall as a share of wealth, unless the stock market falls at the same time.
While wealth was up about 30% from its pre-pandemic level in September, total debt was up only about 22%. Growth was fastest near the middle of the income distribution where mortgage debt rose the most, both over the full interval and over the period since March 2021 when wealth was flat.
Debt pattern
What is more interesting is the pattern in consumer debt— debt not backed by real estate including credit cards, auto loans, student loans and personal loans. Growth in consumer debt skewed heavily toward higher-income households.
Consumer debt as a share of wealth is below its pre-pandemic level for all but the top quintile of the income distribution. Growth in consumer debt was heavily concentrated at the top of the income distribution. Since the end of 2019, growth in the bottom quintile has outpaced growth in consumer debt for the next two quintiles.
However, since the 2022 peak in wealth, consumer debt has fallen for the bottom quintile and risen for all other reported groups. With inflation slowing, the lowest-income households have managed to stop the increase in their consumer debt, perhaps at least in part because credit became less available.
The outlook for borrowing is less clear than that for assets. It depends both on consumer attitudes and desires and the behaviour of lenders who can make it easier or harder for consumers to obtain credit.
Debt burdens remain historically low, although as debt rolls over at higher rates it is likely to trend higher over the next couple of years. Lending standards have been steadily tightened over the past couple of years. How long this continues is uncertain.
Overall, the outlook is for only modest growth in wealth that will struggle to keep up with inflation. Further, risks around this forecast are high given uncertainties about the outlooks for house and stock prices.
