Middle Class Money Angst Still Apparent in Data

If there is a recovery in Americans’ finances, they don’t see it.

The Federal Reserve reported Thursday that the net worth of U.S. “households” increased at about a 5% annual rate in the fourth quarter, a good deal slower than the blistering 20% pace over the two previous quarters, but still a solid increase.

Not long after the news was posted on the Wall Street Journal’s Web site early that afternoon, the vituperative comments began to flow. Many simply dismissed the data as inaccurate or worse. The numbers simply didn’t jibe with what they were seeing in their own finances or those around them.

Most of the gain in wealth has come from the rebound in the stock market, which drove a 15.4% annual rate of gain in households’ equity holdings in the period. For the year, their equity holders increased 30.9%.

And that was reflected in the latest Forbes 400 list, the annual tally of the world’s plutocrats’ lucre. Among Americans — who were relegated to the No. 2 and 3 slots by Mexican magnate Carlos Slim — Microsoft chairman Bill Gates saw a $13 billion increase in his net worth, to $53 billion, while his bridge partner, Berkshire Hathaway honcho Warren Buffett, gained $10 billion in wealth, to $47 billion, both largely because of gains in their investment portfolios.

But those gains accrue to a narrow of Americans. “Households” sound like what makes up Mr. Rogers’ neighborhood, but to the Fed’s statisticians it’s a catch-all category for what doesn’t fit into the other neat data cubbyholes. That means that “households” include not just regular families but also domestic hedge funds, which are out of the reach of 99% of the rest of us.

Housing is the key asset of the hoi polloi, and the value of households’ real-estate assets continued to creep up in the fourth quarter, at a mere 0.9% annual rate, $16.575 trillion from $16.537 trillion. But hey, it still had a plus sign ahead of it for the third straight quarter.

Meanwhile, owners’ equity in household real estate saw a higher absolute and percentage increase, to $6.313 trillion from $6.222 trillion, a 5.9% annual rate of gain. That was aided by a continued decline in households’ mortgage liabilities in the fourth quarter, to $10.262 trillion from $10.315 trillion.

The reduction in mortgage debt was not so much the result of homeowners’ newfound probity in paying off their loans as walking away from them.

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The rising tide of foreclosures, bankruptcies and so-called “strategic defaults,” where homeowners just stop paying mortgages on homes worth less than their associated liability, have become a well-recognized phenomenon in the three months since it was discussed here following the previous Fed Flow of Funds report.

Indeed, instead of a mortgage being the last loan anybody would default upon, now it’s the first. Stop paying your car loan and the repo man comes and you can’t get to work. Stop paying your credit card and there may be no way to pay for luxuries such as groceries and medical bills. Stop paying your mortgage and maybe months later the bank will actually act. They’ve got such a backlog of bad loans that they’ve got their hands full.

So, that’s how American families are getting ahead — by falling behind on their house payments. Not exactly the path to prosperity.

In any case, U.S. households’ total net worth still was down 16% from the end of 2007 and 21% from the absolute peak the following year.

Even more stunningly, households’ net worth in real estate was down by more than half — 53.3%, to be exact — from the end of 2006, the result of the toxic combination of leverage coming from a 16% increase in mortgage borrowing combined with a 25% in property values over the span.

And, while mortgage debt was getting written down in the fourth quarter, consumer credit fell at the most rapid pace since 1980, according to Goldman Sachs’ economists. And in January, the main category of consumer credit showing expansion was student loans, which are supported by various government programs.

As for the asset side, households accumulated Treasuries and most other debt instruments because their cash assets such as bank deposits and money-market funds yield next to nothing.

So, savers’ loss is investors’ gain as the stock market took flight, fueled largely by the Federal Reserve’s policy of keeping short-term rates near zero and buying Treasuries and agency mortgage-backed securities. As mutual-fund flows show, there has been little inflow into domestic equity funds while bond funds have seen a deluge of cash from savers looking a substitute for certificates of deposit paying 1% or so.

In all, the latest Fed Flow of Funds data suggest that, to the extent middle class Americans’ finances are improving, it’s because their liabilities are being reduced by default. The gains in asset values are being concentrated by those so-called households with the ways and means to own equities.

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