Good morning. Today, we meet to discuss household balance sheets, with a particular focus on housing.
Over the past decade, the New York Fed has invested heavily in improving its understanding of developments in the household sector. We have built datasets and created reports and in-depth analyses, many of which we make widely available with the aim of helping the public’s understanding. This work recognizes the crucial role that households play in the economy and the financial system. It also serves to underscore the connection between the mission of the New York Fed and the concerns of families in the Second District. The Federal Reserve’s actions have important effects on everyday “kitchen table” issues like mortgages and auto loans, and we remain focused on those effects, as today’s presentation will demonstrate. Before going further, I should note that my remarks today reflect my own views and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1
At the close of last year, American households in aggregate were the wealthiest they have ever been by many measures. This piece of good economic news reflects the economic expansion that has continued for 106 months, among the longest on record. The principal driving force behind increases in aggregate wealth has been the stock market. Financial wealth, including stocks and other financial assets, now stands at over $80 trillion, more than 75% above the mid-2009 trough. Of course, this is a positive development overall, but not everyone has shared in the good news. Financial wealth is actually even more concentrated among households than income, with the top 10% of households holding 84% of stock market wealth. In contrast, housing wealth—which is much smaller in aggregate—is a more important form of wealth across most of the income distribution.
For most families, their home tends to be their most valuable asset. The exceptions are people at the very top of the wealth distribution, for whom financial assets are more important, and renters, who tend to have low or negative net worth. The fact that housing wealth is so widely held makes its dynamics very important, yet growth in housing wealth has been quite uneven across households, for reasons that we will discuss today.
Housing wealth nearly tripled between 1995 and 2006, exceeding $13 trillion by 2006. As we well know, all forms of wealth in the United States were significantly impaired during the financial crisis. Financial assets fell sharply in 2008, by almost 15%, but had recovered by 2010. Housing wealth, however, started falling earlier—in 2006—and decreased about 35%.
House prices began growing again in 2012, surpassed their previous peak in 2017, and are now almost 50% above their trough levels. Unlike during the boom, however, when debt was rising nearly as fast as prices, debt growth this time has been much more quiescent. Housing debt has risen just 6% over that same six-year period of 2012-2017. The combination of fast-growing house prices and slow growth in housing debt supported the complete recovery of housing wealth by early 2017.
But the fact that aggregate housing wealth has surpassed its previous peak does not mean that everything is the same. In fact, there have been important shifts in the distribution of housing wealth that are critical for understanding the long-run effects of the housing cycle, as well as the outlook for the household sector. In particular, the factors that determine housing wealth are not evenly spread across the population, and those relationships have changed since the pre-financial-crisis housing boom. For example, household formation and transitions from renting into homeownership are much lower than their pre-crisis levels, especially among the young—meaning fewer young people have benefitted from the increase in house prices. At the same time, current homeowners have drawn on their equity at much lower rates relative to the pre-crisis years, which has supported rapid growth in wealth for those households.
Understanding these changes is more difficult than observing them. While it is possible that millennials are less interested in owning housing than previous demographic groups, survey results, including from our own Survey of Consumer Expectations, do not seem to support that notion. In our survey, households (including current renters) continue to view housing as a good investment, and do not seem to see increased risk to owning. So the change in behavior does not seem to be driven by changes in expectations caused by “scarring” from the financial crisis. Nonetheless, that factor may be part of the explanation for why current homeowners have not used their home equity to finance consumption.
A second important part of the story, I believe, is that mortgage credit has been quite tight in the wake of the financial crisis. Tight credit can limit the scope for renters to become owners and for current homeowners to access their equity. Several factors might be contributing to comparatively tight credit for housing finance, including regulation and financial institutions’ wariness about housing as collateral in the wake of the last cycle. Another important factor seems to be the increase in other forms of debt—notably student loans—among younger borrowers with lower credit scores.
Whatever the causes, the implications are important: homeownership is down overall, and especially among the young. Those who have gained the most housing wealth over the last decade—older borrowers with high credit scores—are probably less likely to need the credit that increased housing wealth could collateralize. Those who do have a strong demand for credit and own some home equity may have trouble tapping it if they have less-than-stellar credit histories. These phenomena have implications for the ability of households to finance consumption growth over the medium term.
From the perspective of macroeconomic policy and stability, the overall result is a very strong household balance sheet, with high wealth and low debt in aggregate enabling the sector to absorb many of the shocks that might come its way. Nonetheless, this sanguine picture is not fully representative, as the gains are distributed unevenly among current homeowners and between homeowners and renters. The distribution is important, as it reflects who will likely bear the burden when the next economic downturn occurs. Research by the New York Fed and others has illustrated the distress that delinquencies on consumer debt and housing expenses can have on families and communities. What is perhaps most clear from the work we discuss today is that the shockwaves from the financial crisis continue to resound through the housing sector—its aggregate recovery notwithstanding.
Thank you for your kind attention. I’ll now ask Andy Haughwout to provide details on these developments.