Rising Real Net Worth per capita

As I usually point out... what is the wealth growth (or decline) of those in the lower 90%?

Let me piece together an example. The Jones buy a $350,000 house in Seattle. Last year this house was valued at $320,000, so we've seen a nice increase in wealth. First, this is simply by housing inflation and deducting the CPI-based inflation from it doesn't remotely cover the difference. Home prices are guaranteed to decline in real terms in the next few years; i.e. decline in actual terms OR decline in relation to inflation by staying stagnant. Second, the Jones may have saved up and put in a down-payment, so let's say they have equity of $30,000. Now, if I'm understanding this correctly, the other $320,000 is a loan which is an asset to the bank, but is a liability to the Jones. So while *national* wealth may have increased because the debt is an asset to *someone* in this country, the Jones have added $30,000 in wealth asset, but have also added $320,000 in liability, for a net wealth of -$290,000. And that's to say nothing of property tax liability. What's more, if the home price goes down in actual or real terms, it is deducted only from the asset column of the Jones, not of the bank.

So however we look at it, the top 10% saps more wealth from the bottom 90%, and in fact, the bottom 90% takes on the risk of wealth decline while the top 10% is relatively shielded. But since the per-capita number only divides national wealth by the population, we can just say "hey, look, everyone got wealthier". That just isn't the case.

That should read "a net wealth of negative $290,000 ($-290,000)", but my original post got split at the "-" mark and may not be clear.

Of course net wealth will rise if house prices appreciate massively. The problem only arises once they stop.

If my house appreciates by $50,000 I can easily afford interest payments and increased consumption without decreasing my net wealth. However once house prices stop appreciating I must finance interest spending and consumption from income or else my net worth falls.

It would be extremely worrying if net wealth would not increase during periods of rapid house price inflation.

That wealth will be needed to sustain spending during periods of no or low appreciation. If there was no new net wealth to draw on spending would have to decline or net wealth declines.
For example: If the long-term appreciation is say 5% and the short-term it runs at 10% it's not a good idea to spend as if the long-term appreciation was 8% because spending (or net wealth) will have to decline during the years of lower than %5 appreciation.

Of course, if your spending enables much faster wealth creation in the future it's all good. I think that's the real question.

Increase in housing prices clearly increases living costs; however, this increase is arguably not captured in the CPI because of the imputed-rent method of calculating housing prices. Thus, the divisor used for the "real net worth" calcuation is understated.

Clearly, an increase in housing prices not driven by property improvements represents a gain for those who currently own properties and an equal loss for those who will be buying them in the future..I don't see how it can possibly be a gain for the economy as a whole.

Ah yes, as always this data that purports to indicate something GOOD actually indicates something BAD. Because this is bizarro land. A little more of this kind of terrible economic news and we may as well hand over the keys to our new Chinese and Arab masters. I for one welcome our new foreign overlords.

Oh BTW Mandel, I've soved the whole dark matter mystery. The secret is not dark matter -- it's dark energy. But screw you guys, I'm saving that for my own blog.

David

I have to disagree with you. In a global financial market, a gain in the price of U.S housing can be a gain for the U.S. economy as a whole, because it raises the price that foreigners have to pay for it.

To put it a different way, foreigners are buying up loads of mortgage-backed securities. As the price of housing goes up, the same dollar value of mortgage backed securities is associated with a smaller 'real' chunk of housing.

Ultimately, higher price housing means that we have to sell off less of our economy to pay for the trade deficit. That seems a pretty important thing to me.

So many logical flaws, so little time. Fish in a barrel.

*** Of course net wealth will rise if house prices appreciate massively ***

Wrong. Why do house prices "appreciate massively"? Because there are buyers. Prices don't magically just go up in a vacuum. The prices are being bid up by buyers.

Where do buyers get the funds to buy the house in the first place? From a mortgage. What's a mortgage? A debt. What happens when you match a debt with an asset? They cancel each other out. What does that do to net wealth? Nothing.

Suppose I had once bought a house for $100k, I still owe 50k, it's doubled in value to 200k, and so I have equity 150k. Meanwhile a potential buyer possess nothing in life except 20k cash. Here's the 2-man economy:
220k assets (my house, his cash), 50k debt, 170k net worth.

Now he buys the house for that 200k, borrowing 180k, and putting all his cash down. I'm cashed out and pay off my debt. Now here's our 2-man economy:

350k assets, 180 debt, 170k net worth.

Wow ... the house prices appreciated massively, but there's no change to the system's net wealth! House prices went up, but mortgage debt went up.

*** Clearly, an increase in housing prices not driven by property improvements represents a gain for those who currently own properties and an equal loss for those who will be buying them in the future. ***

uh, no. (clearly??) However tempting it may be, it is plainly incorrect to assert that the rise in an asset value represents a "loss" to some future purchaser -- who has yet make a purchase or to make a decision with regard to his indifference curve (a li'l econ speak for you). In case you've misplaced your dictionary, it's a "loss" when some asset *already purchased* loses value (that past tense thing being the key).

Think long term. What a shockingly enormous "loss" it is to our (Chinese) descendents of the year 3000 AD that all kinds of crap will go up in value twixt now and then? er, no.

Michael...I've got to think about this a bit more, but:

1)If foreigners buy actual property, then you're clearly right that the US economy as a whole is better off because of higher prices
2)If they buy mortgage-backed securities, though the income stream that they will receive remains constant, whatever happens to the housing prices (absent default)
3)If housing prices go up because of inflation, then the foreign MBS buyers are clearly losing out because their constant stream of income is worth less..but this is a function of overall inflation, not just the housing component therof

What am I missing here?

"Suppose I had once bought a house for $100k, I still owe 50k, it's doubled in value to 200k, and so I have equity 150k. Meanwhile a potential buyer possess nothing in life except 20k cash. Here's the 2-man economy:
220k assets (my house, his cash), 50k debt, 170k net worth."

Houses are worth that which people think someone *would* pay for them. A house does not have to be bought to be worth more.

Suppose I own a house valued at $100k. It appreciates to $200k because that's what my neighbor's house sold at.

I take out a $100k mortgage to buy a new car, the bank thinks it's fine because of my equity. Now I still have a house, but I also have a new car and $100k in debt. My net worth is still $100k (plus a car that loses value pretty quickly).

Now a year later people think paying $200k for such a house is nuts and someone buys my neighbor's house for $190k.
My net worth is suddenly only $90k, it has decreased. Why?
Simple, I bought a new car with $100k in debt that is *not* determined by what someone would pay for it.

---

That's why "Assets are contingent; debt is forever."

Mike->"In a global financial market, a gain in the price of U.S housing can be a gain for the U.S. economy as a whole, because it raises the price that foreigners have to pay for it.

To put it a different way, foreigners are buying up loads of mortgage-backed securities. As the price of housing goes up, the same dollar value of mortgage backed securities is associated with a smaller 'real' chunk of housing."

But this presupposes that the foreigners buy the houses. The fact is that they don't. It's American home owners that buy the houses, foreign investors
just buy the bonds that finance the mortgages that
American house buyers need to purchase the homes.

Another troubling fact of this report is the increased leverage in American household finances. Household debt reached a record 124% of disposable income. And debt levels are record high not just versus income but also relative to household assets and net worth. Debt was a record 18.6% of assets. By comparison, the debt/asset ratio was just 14% in 1999. And as we saw after 1999, asset prices can fall, in sharp contrast to debts which do not fall (unless you start paying off the debts).

Kevin writes: "Suppose I had once bought a house for $100k, I still owe 50k, it's doubled in value to 200k, and so I have equity 150k. Meanwhile a potential buyer possess nothing in life except 20k cash. Here's the 2-man economy:
220k assets (my house, his cash), 50k debt, 170k net worth.
Now he buys the house for that 200k, borrowing 180k, and putting all his cash down. I'm cashed out and pay off my debt. Now here's our 2-man economy:
350k assets, 180 debt, 170k net worth."
-
I see your example, which may be true. However, you will note in part 1 that debt is only 29.4% of net wealth, while in part 2 debt is now 105.9% of net wealth. Net wealth of the *individuals* has not increased, but that debt is an asset to *someone*... and that "someone" is the bank. And who owns the banks? The top 10% (who own 2/3 of the wealth, at least, and 80% of public companies). $130,000 in wealth was just added to their asset column. And if housing price declines in actual or real terms, they retain that wealth in their asset column while the individual's wealth declines.

I think it would be interesting to see this chart broken out by quartile or quintile by income with % change in net wealth instead of absolute wealth. Not totally sure, what it would show, but my hunch is that you see most of the gains going to the top two quartiles. Much of the increase in net wealth has been driven by home values, and I assuming a higher percentage of the top two quartiles are homeowners.

Wait, this is bad news.

Why has Real Net Woth per capita only gotten back to what it was in 1999? Hasn't REAL GDP per capita risen by over 10% in this period?

So the ratio of REAL net worth per capita to REAL GDP per capita has fallen by 10% since 1999...

Stefan: *** Another troubling fact of this report is the increased leverage in American household finances...Debt was a record 18.6% of assets. By comparison, the debt/asset ratio was just 14% in 1999. ***

You call it troubling, I call it the utterly predictable and rational result of the fact that DEBT is now MUCH CHEAPER than it was before. Debt is an economic good, traded by buyers and sellers at a flexible price. Lately it's been heavily discounted compared to recent decades' of experience.

It's been a good deal, why not buy more of it? The low cost of debt changes financial calculations. It's often incredibly smart to take advantafge of a heapin' helpin of debt when it's this cheap.

kartik: *** Why has Real Net Woth per capita only gotten back to what it was in 1999? Hasn't REAL GDP per capita risen by over 10% in this period? ***

You write remarkably well for a 4-yr-old, congrats. Perhaps a nice History book will enlighten you that 1999 happened to be approaching the peak of an awful speculative bubble in many stocks. In Hindsight it's undeniable stocks got way overpriced. As a result of those excesses, net worth was unsustainably high; there were also frankly "too many" jobs and companies around, which also distorted some economic figures.

The bubble popped; and we're still recovering. We can be thankful the economy has in fact recovered very well and there are good numbers to report at all, and we didn't get mired in a Japanese style chronic recession.

Alas it was a pipe dream, but, hey, if we Americans didn't experiment with venturesome economics, who would?

Brandon: *** Net wealth of the *individuals* has not increased, but that debt is an asset to *someone*... and that "someone" is the bank. $130,000 in wealth was just added to their asset column ***

You missed one step. Yes the bank gains an asset (mortgage), but it also loses an equal asset in the transaction (money). The bank merely trades a bundle of cash for a mortgage contract. It's a wash, no change to net worth.

If the housing price declines, yes indeed a homeowner can suffer a loss, I don't dispute that. But funny enough, if the homeowner then defaults on the mortgage, then the rich bank stands to likely lose also, with a debt write-off or asset writedown or whatever. (If you really want to make a scare scenario, you could probably work with that one).

Otherwise, so what if the bank sells the mortgage to our foreign masters? Well that's a means by which a foreign investor can invest the excess dollar liquidity that results from the feared trade deficit.

And what if appreciating home values means that that particular mortgage contract represents an ever-shrinking portion of the value of the house? Then Mandel is exactly right even if he is a journalist:
*** Ultimately, higher price housing means that we have to sell off less of our economy to pay for the trade deficit.***
(And no that does not presuppose or require that foreigners buy the actual real property.)

I wonder what would happen if the government had to submit to GAAP accounting rules ... and I wonder what would happen if the President had to sign off on the economic reports coming out of government agencies verifying their accuracy at the risk of his own imprisonment....

Kevin,

You didn't read what I wrote, and obviously didn't understand the question.

If you don't know the answer, why comment at all?

Kartik,

What Kevin is trying to say is you are confusing income (GDP) and assets (net worth) which are two different things.

Kartik: you wrote about real net worth per capita vs real GDP per capita at one point in time being relatively high in relation to that ratio at another point in time. I pointed out to you that asset prices were unreasonably high at your first reference point. Figured I didn't have to spell it out the connection between net worth and asset prices. Perhaps you should contemplate the possible connection.

*** So the ratio of REAL net worth per capita to REAL GDP per capita has fallen by 10% since 1999...***

You did the arithmetic wrong, that's 9%.

Interesting discussion.

Kevin wrote: "And what if appreciating home values means that that particular mortgage contract represents an ever-shrinking portion of the value of the house? Then Mandel is exactly right even if he is a journalist."

That's exactly the point I was trying to make.

Michael - as I noted over at Angrybear, I agree with your general definition of real wealth per capita but I get a different result when comparing whether real wealth per capita was higher v. lower than 6 years. Are you defining government debt using only the public debt of the Federal government or the total debt?

Pgl, just redid the calculations, and got the same answer as before. Here's where the numbers come from:

Net worth=line 41 in table B.100 of the Flow of Funds release
Government debt=line 23 of table L.106.c ("Consolidated Statement for Federal State and Local Governments") of the Flow of Funds release.

Price deflators and population figures come from BEA table 2.1, lines 36, 37, 38.

These seem to give me the same numbers as I posted above.

Michael - thanks for the reply here and over at my post at Angrybear. Your definition makes perfect sense (my did not) for reasons that I expand upon over at the next of my posts at Angrybear. So the call that we have record wealth (in real per capita terms) is FINALLY true.

This is a pretty funny strip of comments to read. You are all way over my head, especially Brandon. 30 years ago I was worth about $900, and my major asset was a Chevy pickup. Since then my stock investing record is awful, but my real estate investing record is good, and I have gone from the bottom quintile of wealth to the top, with a net worth north of $1mm. My average income over the 30 years has been about $34k, according to my Social Security records. I will make about $75k this year. How I did make such progress that with the top 10% draining me all the way, Brandon? It's a mystery!

Steve-o, a little late to the dialogue, but as has been argued in several posts since March, anecdotal evidence is of no real value. Congratulations on doing well in real estate investing, but it isn't really relevant to my particular example.

Recent college graduates are among the poorest and heavily indebted people in society; especially doctors and lawyers. Unfortunately most data fails to show that these "poor" people don't stay poor as their careers advance. In fact statistics may show no improvement in society as a whole as college graduates move on because they are constantly being replaced by other fresh graduates on the bottom wrungs of the economic ladder.

Lets look at this way a city has 9 houses and two oak trees.

9 families come and buy themselves a house each for 10k. ( 1k = 1000 USD)

Total net-worth of the city housing = 90k

More people want to come to the city but there is no additional housing available. So the price goes up. In fact one of these families sold thier house to the Carpenters for 15k.

Total net worth of the city = 15*9 = 135k

More families want to move in.. the Carpenters fell the oak tree and make another house and sell it for 15k

Total networth = 150k

The carpenters fell another oak and make another house.. and put it for sale... nobody comes this time... may be people find the city a bit strange since it has no oak trees, so price goes down 12k... still none comes so price falls to 10 and yes we get a buyer...

Total net-worth = 110k

But wait.. that buyer didn't buy the house all in cash.. in fact he took a mortgage from city housing credit union. The union advanced him 9k and he put 1k down payment.

So whats the net-worth of housing?
Is it 101k?

Can’t state enough how important the sacrifices that go into wealth creation are.

Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?

http://www.richestmanintown.com