During the first quarter of 2013, household balance sheets improved with increases in home values and reductions in mortgage debt, thereby boosting household net worth. These are favorable improvements that will help housing demand in 2013. In particular, over the last five quarters household real estate values have risen by more than $2 trillion.
Since the end of the Great Recession such developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two quarters.
The graph above plots the current value of net worth to disposable personal income (NW/DPI) and the corresponding 25-year historical average (1982-2007). The dashed blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts.
While there has been a general trend of an increasing NW/DPI ratio since early 2009, there have been ups and downs in this process due to stock market and other asset value fluctuations. As of the start of 2013, the NW/DPI measure stood at a value of 5.86, above the historical level of 5.24 and significantly higher than the cyclical low of 4.85 set during the beginning of 2009. The increase since 2009 is a reasonable measure of the improvement in household balance sheets.
However, for the last two quarters, the savings rate and the measure of disposable income experienced non-balance sheet driven movement due to the Fiscal Cliff and its resolution. In particular, the legislation staving off the Fiscal Cliff included a number of tax increases, including an end to the payroll tax cut and rate hikes at the top end of the income distribution.
In anticipation of these higher tax rates, the amount of income paid out and earned by American households jumped in the last quarter of 2012 (the uptick/peak in 2012 for the blue line below). As this accelerated income was due to a one-time cause, spending did not increase at the same rate. Thus, with a rise in income and no corresponding increase in spending, the personal savings rate increased to a revised rate of 5.3% in the fourth quarter of 2012, marking the highest rate of savings in more than two years.
As we forecasted in March, the data for the first quarter of 2013 showed that DPI fell at the start of year due to the accelerated income payments made at the end of 2012, as well as the enacted 2013 tax hikes. The result was that the NW/DPI measure reached its highest level since 2008. With a drop in DPI, and little change in consumption, the personal savings rate fell considerably.
It is important to note that while we’ve typically associated a rise in NW/DPI as a sign of recovering balance sheets, in this case the rise was drive by the decline in DPI. Similarly, the drop in the savings rate to 2.3% is less a sign of healing balance sheets, and more due to the timing impacts of income shifting due to the Fiscal Cliff. Data from the second and third quarter of 2013 will provide a clearer picture.
Nonetheless, household balance sheet repair is ongoing. Flow of Funds data from the first quarter of 2013 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 12% or $1.27 trillion. And the value of real estate owned by households has risen for the last five consecutive quarters for an increase of $2.2 trillion.