US households lost an estimated $6.8 trillion in wealth in the first three quarters of 2022 as the SPX stock market,
DJIA,
COMP,
has lost more than 25% of its value, the Federal Reserve reported Friday in the government’s quarterly financial accounts.
Nominal net worth fell 4.6% to $143.3 trillion, as the market value of assets fell by $6 trillion and liabilities increased by around $900 billion. Household balance sheets were supported by a 10% increase in home equity, which is the biggest source of wealth for most American families.
But the loss of real wealth from January to September was about twice as large – $13.5 trillion in current dollars – after taking into account the rapid inflation recorded this year. Inflation makes debts and liabilities worth less in terms of purchasing power.
The 8.6% decline in real wealth over three quarters is the second fastest decline on record (data series begins in 1959). The single largest drop was following the financial crisis of 2008-09. (The wealth lost during the Great Depression of the 1930s would probably hold the record if we had the data.)
Healthy balance sheets — for now
Even after adjusting for inflation, real household wealth was about 10% higher than it was at the end of 2019, just before the COVID-19 pandemic hit.
Household balance sheets—on the whole—remained in excellent shape despite Wall Street’s losses and the erosion of purchasing power. Wealth as a share of annual personal disposable income (after tax) slipped slightly to 769%, not far from the record high of 825% in the first quarter of the year.
At $18.8 trillion, liabilities were just 103% of annual disposable income, well below the 136% peak seen in 2008, just as the housing bubble burst. In real terms, liabilities are lower today than they were then, despite a much larger economy.
Homeowners, in particular, were in good financial shape at the end of September, with their home equity hitting a near-record high of 70.5% of market value, down from a record low of 46% in 2012. But if house prices continue to fall as they have done in recent months, homeowners with little exposure to the stock market will start to feel poorer. What will happen to house prices as mortgage rates rise is a major unknown facing policymakers and homeowners.
take on more debt
Warning signs are also flashing as household debt has woken up, like Rip Van Winkle, after a 10-year nap. After a decade of no debt growth in inflation-adjusted terms, real household debt grew at an annual rate of 4.3% in the third quarter, the fastest growth since 2007.
Consumers go into debt or dip into their savings to maintain their standard of living. According to a measure highlighted in this Fed report, the personal savings rate fell to 3.7% of disposable income, after averaging more than 10% over the past 10 years.
Overall, however, households still have plenty of cash. Bank accounts and money market funds are still bloated with over $18 trillion in relatively liquid deposits. That’s almost enough to pay off every penny of household debt.
But of course, the people who hold the debt and those who have millions in the bank are not the same.
The Fed will release additional details on the financial accounts next week, including the breakdown of assets and liabilities by various groups, such as age, race, education level, income and wealth. But even Fed economists have questioned the accuracy of these distribution tables, as the pandemic has disrupted everything.
Follow the money, if you can
One of the biggest unknowns in today’s economy is how much savings typical families should count on if times get tougher. Under one set of assumptions, the typical family in the bottom half of the wealth ranking has about $10,000 in cash equivalents available. It doesn’t pass the smell test for me considering how many people live paycheck to paycheck. But who knows?
We may not know who really owns all that money until more precise data from the Fed’s survey of consumer finances, conducted every three years, comes out next year.
I hope families are resilient enough to maintain their standard of living even as the Fed continues its efforts to slow spending to bring inflation back down to par. If ordinary families tighten their belts too much, a job- and wealth-destroying recession is inevitable.
Rex Nutting is a columnist for MarketWatch and has written about economics for over 25 years.
Learn more about wealth and inflation
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Americans are feeling poorer for good reason: Household wealth has been shredded by inflation and soaring interest rates
Why are Americans so grumpy about the economy? They’ve never lost so much purchasing power in a year as the stimulus dries up and inflation boils over
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