Below is a graph showing net worth in the U.S. since the year 2000. By this definition, financial assets included in a definition of net worth includes things like stocks, bonds, cash, money market funds, as well as “owner’s equity” of real estate owned. Owner’s equity is the market value of real estate less any mortgages or other debt upon that real estate. (Even though the net worth of nonprofit organizations is included, it is a very low percentage of the total.) We see net worth increasing sharply up until the last financial downturn and then again rising during the economic recovery since then. Because of the decline in both stocks and real estate prices, net worth in the U.S. declined by about 20% from 2007-2009, and would not reach the 2007 highs for five years, not even accounting for inflation.
The purple line in the graph tracks the Wilshire 5000 index, an index measuring the entire U.S. stock market. Not surprisingly, there is a high correlation between the level of financial assets and the U.S. stock market. Using quarterly data over this 17-year span results in a correlation coefficient of about .94, close to perfect correlation. The financial markets and the nation’s collective net worth rise nearly in tandem, and fall in similar fashion.
Although the amount of real estate equity only accounts for less than a sixth of net worth, the level of underlying mortgages and real estate values combine to produce the “owner’s equity” component of real estate net worth. Because of mortgages, real estate equity is magnified by home value changes, both up and down. As the chart below shows, at the peak of the housing bubble, real estate equity began declining even before home prices did, as borrowers became increasingly leveraged with mortgage debt. Once real estate prices began falling, real estate equity fell much faster. The 30% decline in real estate prices after the real estate bubble busted resulted in a more than 60% decline in overall real estate “owner’s equity” in America.
Hidden behind this simple graph are the millions of homeowners whose (in some cases, substantial) home equity were completely eliminated by the decline in real estate prices. If a homeowner is considering the value of his or her home as a financial asset, he or she should also recognize that a highly mortgaged piece of property is similar to buying stocks on margin, where small price changes can lead to large changes in equity. And given that real estate owner’s equity among the lower and middle-class generally constitutes the majority of their net worth, home value changes generally impact middle-America much more than stock prices.
The concept of net worth, as valuable as it is as a financial yard-stick, is also transient. Financial assets such as stocks certainly fluctuate, sometimes devastatingly so. And even though real estate values don’t change to the same extent, once high loan-to-value mortgages are part of the equation, a real estate owner’s net worth can fall sharply even with a relatively small decline in real estate prices.
How much wealth inequality is too much?
In the past, differences of income and wealth within a population were considered normal, and perhaps healthy, aspects of a market economy. The potential to earn greater incomes and accumulate wealth were motivating factors behind entrepreneurship, education, investment and plain old hard work. But in recent decades, as the gaps between the rich, poor and middle-class have widened, there has been increasingly conversation, and rightly so, about these differences. If you look at the countries with the largest inequalities between rich and poor, such as the U.S., it is worth considering whether these gaps are now wide enough to be detrimental to society and economies, and to wonder why these inequalities are growing.
In recent years, most of the conversation concerning inequality has centered on income inequality. For example, in January of this year, the World Economic Forum released a study showing that the U.S. ranked 29th out of 30 countries in income inequality during the period covered (2008-2013). There has been rising income inequality in the U.S. for four decades now. In the late 1970s, the share of the country’s total income earned by the top 1% was under 10%. That share has now more than doubled, amounting to more than 20% of the country’s income. A 2011 report by the CBO found that incomes for the top 1% of earners grew more than six times the rate of middle-income earners during the period of 1979 to 2007 (275% versus 40%, respectively).
Although less reported on, increases in wealth disparities have been even greater than income differences. The report from the World Economic Forum also listed the U.S. in 29th out of 30 countries in wealth inequality. The Global Wealth Report from Allianz in 2015 reported that based on the Gini measure of wealth inequality, the U.S. ranked number one in wealth inequality, at .81, showing the most inequality of wealth among the nations studied. (On the Gini measure, 0.00 would represent perfect equality of wealth, and 1.00, perfect inequality of wealth.)
A rising stock market is sometimes thought to be the tide that lifts all boats, but the majority of American families have little or no wealth in the stock market. According to a poll by Pew Research, the majority of families earning less than $75,000 a year have no stock market ownership, including barely one in five families owning stock that earn less than $30,000 a year. Conversely, the Economic Policy Institute reported that in 2011, the wealthiest 10% own 75% of the wealth of the country, mostly concentrated in financial assets like stocks and bonds.
That share has been rising over the past twenty years, neatly coinciding with the booming stock market over the same period, and more than double the levels of the mid-1990s (see graph below).
The Economic Policy Institute report also found that in 2009 the top 1% of households had a net worth that was 225 times greater than the median household’s wealth. That ratio has likely only widened since then with the sharp stock market gains since then. Despite the sharp gains in the stock market and real estate markets during the economic “recovery”, stock ownership has not increased among the poor and middle-classes and homeownership rates have fallen among them. As financial asset and real estate ownership becomes more concentrated among the upper class and already wealthy, further increases in stock market and real estate gains primarily accrue to the upper class.
Research by Emmanuel Saez and Gabriel Zucman found that the wealthiest 0.1% of American families (160,000 families, about $20 million needed to gain entry into this club) – now control as much wealth as the bottom 90% of Americans. Below is a graph by Saez and Zucman showing the rising share of household wealth owned by the top 0.1% of Americans. While income inequality is high and rising in America, the ratio of wealth owned by the wealthiest 0.1% compared to the lower 90% is roughly ten times that of incomes.
The 2013 Survey of Consumer Finances reveals some of the wealth disparities among Americans. (Unfortunately, more recent consumer data has not yet been released, and with overall net worth levels about $12 trillion higher than three years ago, the next Consumer Finances report should be interesting.) Below, DQYDJ, https://dqydj.com/ has crunched the data from the survey to report on American Net Worth. Based on their estimation, about twelve percent of Americans were determined to have a zero or negative net worth. The 50 percentile was estimated to have a median net worth of about $81,000, the 90 percentile was at about $943,000 and at the 99 percentile, the median net worth was estimated at about $7.9 million.
While one can point to an increasing level of financial wealth as a measure of a country’s success, it means little without considering the distribution of that wealth. To take an extreme example, imagine if the entire wealth of a country, $100 trillion, with one million people, were owned by one person, with the remaining population each owning no wealth. Even though, overall, it may indicate an extremely wealthy country (and perhaps an increasingly wealthy one, if the stock market is rising sharply), most people would not consider that a successful model to follow, nor something to be celebrated.
Unfortunately, such an example, is not terribly far from reality. A report from earlier in the year by Oxfam said that just eight men – Bill Gates, Warren Buffet, Jeff Bezos, Mark Zuckerberg, Larry Ellison, Michael Bloomberg, Carlos Slim and Amancio Ortego - own as much wealth as half of the Earth’s population.
As we examine the graph above of U.S. household wealth one more time, we see that, not only does the bottom 50% of the population have almost no net wealth, at least compared to the rich, that miniscule share has been shrinking since the 2008 financial meltdown. The stock market and the wealthy may have recovered nicely since then, but at least half of America hasn’t. More on this next time.