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How Rich Do You Feel?

The stock market is at multiyear highs. Real estate prices in several cities look like they've bottomed. Employment is bouncing back. As you can imagine, this has been good news for households' balance sheets.

Household net worths fell by $13 trillion from 2007 to 2008, according to the Federal Reserve's Flow of Funds report (link opens PDF file). Since then, wealth has bounced back by $6 trillion -- and that doesn't include the recent stock rally that's sent the S&P 500 (INDEX: ^GSPC  ) up over 10% this year.

Yet the scars left by the recession are deep. Adjusted for inflation, aggregate household net worths are essentially flat since 2000:

Sources: Federal Reserve and author's calculations.

Keep in mind that this is aggregate net worth, not average, or even per household. In real terms, the average U.S. household is poorer today than at the turn of the century. Wealth distribution skews the picture as well. According to a paper (link opens PDF file) by Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, 58% of all income growth (including realized capital gains) from 1976 to 2007 went to the richest 1% of households. Membership in that group varies wildly by year, but the point remains: Aggregate net worth growth has been dismal, and what little growth there has been concentrates to a small subset of households. Most are poorer now than they were a decade ago.

The biggest culprit of that is housing. Households' equity in real estate (home prices minus mortgage debt) has dropped off a cliff, as the Fed's report shows:

Source: Federal Reserve.

In the 1950s, Americans owned twice as much of their homes as they do today (as opposed to financing with debt). As recently as 1987, housing equity was 80% higher than it is now. Home prices have declined by over $5 trillion since 2007, yet mortgages have only fallen by about $1 trillion.

Think of it this way: The housing bust cut household net worths by $4 trillion. In 1950, the inflation-adjusted net worth of all American households was about $9 trillion. So in the course of a few years, bad housing bets wiped out almost half a 1950s America.

Stock market wealth is another story. Household ownership of stocks has been volatile over the years, but is now close to pre-recession highs (particularly after the recent rally, not reflected in this chart):

Source: Federal Reserve.

There are two reasons stock ownership has rebounded. First, and most obvious, the market has come roaring back. Another less-appreciated reason is that most investors kept investing during the bear market.

When markets plunged last summer, 98% of investors at fund giant Vanguard didn't make a single change to their portfolio. Throughout the whole course of the financial crisis, just 3% of Vanguard investors cashed out. When we interviewed other major brokerages like E*TRADE Financial (Nasdaq: ETFC  ) and TD AMERITRADE (Nasdaq: AMTD  ) last year, the results were similar -- people kept investing during the downturn. Most Americans invest in stocks through automatic contributions to their 401(k) retirement accounts, which require no month-to-month action. Indeed, some surveys have shown that many don't even realize they're investing in these plans. Yet contributions to broad index funds made in late 2008 or early 2009 have now roughly doubled in value. That adds up, and it's been a boon for household net worths.

But in percentage terms, the biggest change in household net worths in recent years has been in ownership of Treasury bonds:

Source: Federal Reserve.

I included interest rates on 10-year Treasury bonds here for perspective. Americans had little interest in Treasuries when they yielded almost 6%, but had an insatiable appetite for them once yields fell to half that level. Household ownership of Treasuries nearly tripled from 2008 to 2010, rising by more than $800 billion.

While that's since tapered off and much of the increase is due to rising bond prices, households still own a ghastly amount of Treasuries that yield close to nothing -- negative yields after inflation, in fact. As Warren Buffett wrote in his recent letter to Berkshire Hathaway (NYSE: BRK-B  ) shareholders, "Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: 'Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.'"

How has your household's balance sheet changed in the last few years? How rich do you feel? Sound off in the comments section below.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and TD AMERITRADE. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2012, at 11:13 AM, elevensmile wrote:

    Life is good! Much better than 4 years ago. By staying in the market, 401K is now at record levels. We've been spending to help improve the economy while paying off remaining mortgage on 2nd home (refi'ed at 2.875%). I look forward to retiring from my job at the non-bankrupt auto company in a couple more years. Property taxes are lower, and my wife's income is peaking. A big relief after several years of high anxiety! Now if we can just keep them from screwing up Social Security after my lifetime of payments...

  • Report this Comment On March 14, 2012, at 11:43 AM, greenvillewolf wrote:

    I feel pretty rich, even though I'm not. My wife and I have good jobs, we're able to pay our bills and have money left over to save and have a little fun. And we have good families and health.

  • Report this Comment On March 14, 2012, at 12:16 PM, 7ate9 wrote:

    Very rich in spirit, financial freedom, and no debt. I am lucky to have kept the same job during the recent downturn, and have been able to save a lot by not buying a house during the boom (I almost did). My 401(k) is looking amazing now too, thanks to a strong beginning to this year.

  • Report this Comment On March 14, 2012, at 12:37 PM, DJDynamicNC wrote:

    "Americans had little interest in Treasuries when they yielded almost 6%, but had an insatiable appetite for them once yields fell to half that level."

    Of course, that market does not exist in a vacuum; the perception of them is as a safe haven (for good reason) and it's a reasonable (if not always wise) decision to flee that way during crises.

    10 years ago I didn't own anything but a bunch of debt and a few dreams; now I've founded and manage two companies, invest regularly and Foolishly, and I've more than doubled my income over the past three months. I feel richer than ever, and in fact, because I'm edging up on my maximum income cap, I am feeling about as rich as I'll ever feel. It's a nice feeling, and the Fool has played a role in making it happen, so thank you. :)

  • Report this Comment On March 14, 2012, at 12:39 PM, DJDynamicNC wrote:

    "Now if we can just keep them from screwing up Social Security after my lifetime of payments..."

    I'm optimistic on that front. A lot of us are fighting that fight and it remains the most popular government program. Even the tea partiers still collect their social security.

  • Report this Comment On March 14, 2012, at 3:51 PM, KCinAustria wrote:

    Any way I can opt out of Social Security? I view it as the greatest Ponzi scheme of all time, and I'm saving/investing as though I won't get anything when I'm 65, or 70, or ever. (More than 3 decades away.) And yeah, I feel as rich as I ever net worth has tripled in the last few years...mostly thanks to finishing grad school, but keeping the same spending habits. And partly due to the stock rebound. (And starting from a relatively small value, of course.)

  • Report this Comment On March 14, 2012, at 5:47 PM, Tetejoe73 wrote:

    Our net worth has been up 20% over 20 years, since our house we are living in, is in zip.14450. I too, continued to invest in stocks through the down turn, Therefore up 20%. The accident of living in a strong real estate market is a saving grace!

  • Report this Comment On March 14, 2012, at 6:18 PM, Chontichajim wrote:

    How timely with reguard to the Treasury ownership. The other household products looked familiar among people I know, but I had no idea that many individual savers bought Treasury bonds.

    Looks like your article chased a good deal of them away today as the rate on 10 years went up about 0.17% in one session.

  • Report this Comment On March 15, 2012, at 9:16 AM, msamorales wrote:

    The poorhouse is always around the corner for everyone. Stay thirsty my friends.

  • Report this Comment On March 15, 2012, at 11:17 AM, DJDynamicNC wrote:

    Tetejoe - we're neighbours! I live downtown, 14607. You live in a gorgeous town, though I require the hustle and bustle of the city for my day to day life.

  • Report this Comment On March 15, 2012, at 12:46 PM, CMFTomBooker wrote:

    Morgan.. another good one.

    I consider this helping in a healthy way because the MSM piling it on that we're really getting around the bend, when "No", there's some positive notes.. but there are still a lot of people in different degrees of less now, if not screwed, and the "Recovery" is incredibly fractured.

    One thing i want to offer up for harder look is that "Another less-appreciated reason is that most investors kept investing during the bear market."

    First, the vast majority of Households have no meaningful involvement in the stock market. This which seems to me as a fact, depends upon who you speak with, and is up for re-evaluation at any time.

    Next, yes, last Summer/Fall the S&P was worth $2T or $3T, depending upon what day of the week it was. But the Retail part of that performed the 3rd mass evacuation from the Equity market in 3+ years.

    The ICI numbers for Flow of Long-Term Mutual Funds are considered reasonable consensus representation. (Which is open for discussion, should need be)

    Here are the most recent numbers, but lower in the page there is a link for a spreadsheet for the past 5+ years. (To get my coming attempts at points, you have to do a little regression analysis. Ex: Dec and Jan have lousy correlations to what is going on)

    first thing i noticed was how eerily "smart" the first waves of us "dumb" money are, when indicating a trend change.

    Secondly, retail flows have closely anticipated and tracked QEing hints, beginnings, and ends.

    Last year, notice a large evacuation from equities starting in the April/May time frame, when QE2 was ending. The big headliner number would hit later, but a much bigger total had already vamoosed , and would continue into the end of the year.

    The market has filled its waters with chum, but the retail money refuses to take the bait.

    I'll save a calculator workout. On each of these cycles a good hunk less returns to equities in.the next cycle.

    This sets-up the viable notion that it has been net pounded into Treasuries (I hope everybody is staying in short maturities ;)

    But there's still money missing, which is likely in commodities and mattresses.

    Possibly (but perish the thought) this retirement money is being held to pay for food and electric bills.

    I look richer because I invest here, but I don't feel richer with my healthcare going 10% this year, property taxes going up 12.5%, a third of a gallon of ice cream is now $1 higher than when they reduced it from a half gallon, and business is here one month and turns to vapors the next month.

    Per the treasuries...

    It's pretty bad when people would take a net negative position, in fret of getting their kneecaps busted again in the market.

    Way back when, the Japanese started buying their own Sovereign's debt. Later the gov't would capitalize on it and create purchase programs. But at first it was just safety from a gov't and banks, who were wallpapering over their blackboxed bad assets.

  • Report this Comment On March 15, 2012, at 3:01 PM, Merton123 wrote:

    This is an election year. I wonder how many bull markets versus bear markets have occurred during election years? Can a investor predict a stock market upswing based on the statistical data of previous election years?

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