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Increasing House Values Playing Significant Role in Wealth Recovery

Monday, June 30, 2014

By Juan M. Sánchez, Economist

Household asset values are important factors in understanding the behavior of the economy. Among other things, they affect households’ willingness to work, buy goods and invest in education.1 Household wealth was badly affected during the financial crisis by the abrupt declines in the stock market and in house prices. By the first quarter of 2009, total losses were, on average, larger than two yearly incomes.2 Since then, total household wealth has been recovering, with some individual components showing faster growth than others.

On June 5, the Federal Reserve Board released its Financial Accounts of the United States, which contains data on assets, liabilities and net worth of different sectors of the economy. Net worth, also referred to as wealth, is the difference between household assets and liabilities. Changes in wealth are often associated with changes in the value of assets because of changes in prices.

Total assets of households and nonprofit organizations increased significantly during the first quarter of 2014, rising from $94 trillion to $95.5 trillion, or an annualized rate of 6.5 percent.3 This aggregate trend is mostly the consequence of a sharp increase in the value of household real estate. Indeed, more than 50 percent of the increase is due only to household real estate value, which increased at an annualized rate of 16.5 percent.

The increase in household real estate value is important because it directly affects how much equity households have in their houses. As of the first quarter of 2014, owner equity in real estate as a percentage of household real estate was 53.6 percent. This number is significantly higher than in the first quarter of 2009, when it was only 36.4 percent and at the lowest level of the recession. Other types of assets also increased during the first quarter of 2014, including pension entitlements, corporate equities, deposits and money market fund shares. Overall, they increased at an annualized rate of 4 percent.

This aggregate trend is quite strong and may help explain certain optimism in the economy4 despite the weak performance of GDP, which declined at an annualized rate of 2.9 percent in the first quarter of 2014.

Notes and References

1 Jawadi, Fredj and Sousa, Ricardo M. "Consumption and Wealth in the U.S., the U.K. and the Euro Area: A Nonlinear Investigation," NIPE Working Paper 24/2012, NIPE — Universidade do Minho, 2012. Disney, Richard and Gathergood, John. "House Prices, Wealth Effects and Labour Supply," Discussion Papers 13/02, University of Nottingham, School of Economics, 2013.
2 Glover, Andrew; Heathcote, Jonathan; Krueger, Dirk; and Ríos-Rull, José-Víctor. "Intergenerational Redistribution in the Great Recession," NBER Working Papers 16924, National Bureau of Economic Research, April 2011.
3 Here, nonprofit organizations are included together with households because that is how the information is published in the Financial Accounts of the United States table. Most of the assets correspond to households, however.
4 Optimism can be measured by the Conference Board's index of consumer confidence, which rose to 85.2 in June, its highest value since January 2008. See more here: Madigan, Kathleen. "Consumer Confidence Index Hits Its Highest Point in Over Six Years," The Wall Street Journal, June 24, 2014.

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