Household Wealth is at a Post-WWII High: Should We Celebrate or Worry?

Aggregate household wealth reached a new high of almost $93 trillion in 2016, measuring a post-World War II record 6.61 times annual disposable personal income (see Figure 1).¹ The previous record wealth-to-income year was 2006, at 6.59 times income. The global financial crisis and Great Recession followed soon thereafter, triggered in no small part by collapsing asset values that had inflated household balance sheets. Before that, household wealth had reached a new high in 1999, at 6.24 times income. The collapse of the dot-com bubble and a recession likewise followed in short order.

Does the recent peak in household wealth herald a renewed collapse in asset values and another recession? Only time will tell for sure, but the composition of today’s record household wealth might give us some comfort. In particular, neither of the two large and volatile asset classes of equity shares and real estate, whose sharp declines triggered the last two recessions, is at an all-time high now compared to income or assets. Households’ liabilities such as mortgage debts, which overwhelmed millions of U.S. families during the housing crash, also are substantially less worrisome than they were then.² Nevertheless, recent history shows that extremely high wealth levels like those of today are no guarantee of household financial stability or broader economic strength.

Post-WWII High in Household Wealth

The average ratio of net worth (or wealth, defined as assets minus liabilities) to disposable personal income for the entire period covered by the Federal Reserve’s Financial Accounts of the United States (1952-2016) was 5.4. The combined wealth-to-income ratio of all U.S. households was 6.6 in 2016, and likely increased further in early 2017 as equity markets and broad house-price indexes moved notably higher.³ Clearly, U.S. household wealth is very high now by virtually any measure.⁴

Equity shares represented about 24 percent of household assets in 2016, above the long-term (1952-2016) average of 16 percent but notably below the record share of 29 percent reached in 1999 (see Figure 2).⁵ More recently, in 2014, equity shares constituted a slightly higher proportion of household assets than in 2016. Household holdings of equity shares were 1.84 times as large as disposable personal income in 2016, trailing only 1999’s ratio of 2.08 times (Figure 1). Equity wealth today is far above its long-term average relative to both assets and income but, in both cases, is slightly less than two standard deviations above average—that is, not as extreme as net worth.

Real estate peaked both as a share of household income and assets in 2005, at 2.6 times income and 33 percent of total assets, respectively. Those levels were more than two standard deviations above their respective long-term means at that time (covering 1952-2005). In contrast, the ratio of real estate to income in 2016 was only slightly above the long-term average, while its share of assets was below the 1952-2016 average. Thus, housing does not loom particularly large on household balance sheets today.

Similarly, total liabilities in 2016 were much lower relative to both household income and assets than at these ratios’ respective recent peaks. Households’ liabilities in 2016 were slightly larger than disposable personal income, down from 2007, when liabilities were almost 1.4 times as large as personal income. Liabilities were equivalent to 14 percent of total assets in 2016, down from a high of over 20 percent in 2008.

Finally, all other assets—a category that includes a broad variety of assets other than equity shares and real estate—were near an all-time high in 2016 as a multiple of income but not as a share of total assets. Assets included here generally are less volatile than equity shares or housing.⁶

Spikes before Declines in the Recent Past

The previous two sharpest post-World War II increases in the ratio of household wealth to income preceded major asset-price declines and recessions. The third recent sharp increase in household wealth to historically high levels is underway now. Will this time be different?

As described above, the composition of the aggregate household portfolio today arguably is less worrying than at the 1999 or 2006 peaks. Neither equity shares nor real estate are at unprecedented levels compared with household income or assets. Household liabilities, which created huge problems after 2006, are much more moderate today. These factors may calm concerns that a collapse of either market is imminent. If one market crashed, household wealth might be buffered by resilience in the other, as occurred after 1999. However, diversification failed after 2006, as both equity and real estate markets fell sharply.

As always, the significance of a milestone such as a new post-WWII peak in household wealth will be clear only in retrospect. Supporting the argument against an interpretation of the 2016 peak as an ominous signal of imminent collapse is today’s more benign composition of the aggregate household balance sheet. Also weighing against that reading: the possibility that factors unique to 1999 and 2006 other than the wealth peaks were important causes of those downturns. On the other hand, the only experiences we’ve had with wealth-to-income ratios far above previous historic norms both ended badly. Caution certainly is warranted.

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William R. Emmons is lead economist at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Lowell R. Ricketts is lead analyst at the Center.