NAHB has been tracking two key economic variables that are critical for a robust and sustainable rebound in housing and the economy as a whole: the ratio of household net worth to disposable income (NW/DPI) and the personal savings rate.

The NW/DPI ratio can be thought of as a measure of the health of household balance sheets. It tells us how much household wealth exists relative to available income. After recent data revisions, over the 1982 to 2007 year period, this measure had an average of 5.19 (i.e. households, in aggregate, typically possessed total wealth equal to their current disposable income multiplied by 5.19). In early 2006, this ratio peaked at a value of 6.46. It then fell to 4.69 at the beginning of 2009, as housing price and stock market declines took a toll on household wealth.

The personal savings rate tends to be negatively correlated with NW/DPI, rising as household balance sheets deteriorate and falling as they improve. In turn, the personal savings rate has an important effect on macroeconomic growth, with a rising savings rate holding back short-run growth due to declining housing consumption.

The graph above plots the current value of NW/DPI (red line) and the 25-year average (1982-2007) (green line). The 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.

Household balance sheet repair, which is accomplished in part by household deleveraging as families pay down debts and build up savings, continued in the fourth quarter of 2011. Moreover, the general trend has been one of an increasing NW/DPI ratio since early 2009. However, there have been ups and downs in this process due to stock market and other asset value fluctuations. At the end of 2011, the NW/DPI measure stood at a value of 4.99 (plotted on the right axis of the chart above).

Given the post-2009 improvement in household balance sheets, the personal savings rate has continued to decline. After reaching 6.2% in mid-2009, the savings rate now stands at 4.5%. We expect the rate to continue its general decline to a rate closer to 4%, which is contrary to the expectations of some observers who as late as last year expected the rate to increase to 8% or higher. The overall declines in the personal savings rate have led to increases in personal consumption expenditures.

If household deleveraging continues at the current post-2009 pace, then household balance sheets should return to their historical norms in late 2013. This is later than I had previously estimated, but that is due to declines in household wealth that occurred in summer and fall of 2011. Nonetheless, the continuing improvement in household balance sheets should result in additional declines in the personal savings rate.

Finally, Flow of Funds data from the final quarter of 2011 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 7.3% or $777 billion. However, the value of real estate owned by households has fallen 23.5% over the same period. As a result, total household equity as a share of real estate value has remained around 40% since 2008 and currently stands at 38.3% as of the last quarter of 2011.

Tags: deleveraging, economics, flow of funds, home building, homeowner equity, household balance sheets, household net worth, housing