Household Balance Sheet Repair Takes a Step Back, but Mortgage Debt Down $1 Trillion


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 5.24 (i.e. households, in aggregate, typically possessed total wealth equal to their current disposable income multiplied by 5.24).

In early 2006, this ratio peaked at a value of 6.52. It then fell to 4.77 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, took a step back in the second quarter 2012. 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 second quarter of 2012, the NW/DPI measure stood at a value of 5.27 (plotted on the right axis of the chart above). While lower than the first quarter measure of 5.35, the current value remains above the historical average of 5.23, as can be seen at the end of the graph where the red line remains above the green line.

Given the ups and down of the NW / DPI, a four-quarter moving average may be able to provide a more accurate reflection of where we stand. Currently, the four-quarter moving average stands at 5.21, slightly below the historical average. If current trends continue, then balance sheets should return to their historical norms in 2013. 

However, because of the second quarter declines in household net worth, the personal savings rate has increased. After reaching 6.2% in mid-2009, the savings rate now stands at 4%, up from the post-Great Recession low of 3.4% set during the final quarter of 2011.

We expect the rate to continue its general decline to a rate closer to 3.5%, which will lead to increases in personal consumption expenditures. But the savings rate has increased in recent quarters, in part caused by backtracking in balance sheet repair. And a rising savings rate holds back GDP growth.

Finally, Flow of Funds data from the second quarter of 2012 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 9.8% or $1.045 trillion. However, the value of real estate owned by households has fallen by a net 16% over the same period.

But rising home prices in some parts of the country (as seen by the uptick in the green line below) are causing aggregate home equity to grow. As a result, total household equity as a share of real estate value has increased to 43% after hovering near 40% for several quarters. 



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