Household net worth is up, but what does that mean?

Jeff Thredgold’s latest electronic newsletter (thredgold.com). begins with an impressive heading: “$51,100,000,000,000 … another new record.”

The article addressed the issue of Americans and their savings. The $55.1 trillion figure is up from $43.58 trillion in 2000 (before the Wall Street tech wreck). Total net worth (not savings) at the time was down to $40 trillion for several years, nearly all of that was due to weak equity values. According to Thredgold, the latest record is due to two factors:

• The ongoing increase in home values. Homes now equal about 40 percent of net worth.

• The modest rebound of the American stock market over the last three years.

Nearly 70 percent of American families now own their homes. Average home prices have risen 57 percent in the past five years. At the same time, 51 percent of U.S. families own stocks, up sharply from 37 percent in 1992. Median net worth is now $100,000 (half above, half below). But the average family net worth is $460,000. This overstates the typical family’s net worth, as the richest households are really rich.

Thredgold goes on to explain that when home and stock prices rise, Americans feel wealthier and tend to spend more. (We certainly have seen sustained consumer spending over the past three years.) This is called the wealth effect.

Savings rates are flat or even negative year to date, but we need to define our terms. Personal savings by Fed definition is household income less taxes and less consumer expenditures of all types. This does not incorporate rising stock or home values.

For instance, if you sell stocks, the gain is not considered part of your income. Another factor over recent years has been the meager interest rates on savings accounts. These have increased from the 1-to-2 percent to the 3-to-4 percent range. This may well prompt more households to save in the traditional sense. This is true for CDs as well. Many households consider a line of credit or home equity loans as their emergency funding source in lieu of the hard savings their parents had.

In Japan, lack of consumer confidence resulting in low consumer spending and high rates of saving at very low, zero – or, in a few cases — negative interest rates. The Japanese government had to get people to spend more to ignite the consumer push factor for the economy. I doubt that will be a problem here in America. Most Americans need little encouragement to shop!

However, the cooling-off of house prices may prompt households to pull in their spending horns a little bit. Only time will tell. For most households burdened with start-up debt, school loans, etc., it is hard to save without going on an austerity budget. Good jobs are hard to come by, and younger Americans work significantly more hours to earn what their older brothers and sisters earned, not to mention their parents.

Rising health-care costs take a bite too. Consequently, many young families do not fully participate in the retirement plans available to them. According to Jeff Thredgold and USA Today, employee participation in 401(k) retirement plans fell from 80 percent in 1999 to 70 percent in 2005. Some of that is due to more options available, such as Roth IRAs, but the flat or declining savings rate is indicative of stressful retirements down the road.

Housing prices may be leveling off. At a minimum, they will not continue to rise at the 10-to-12 percent annual rate. Perhaps 5 percent is more likely. Some markets will actually decline. A key driver will be interest rates. As long as petro dollars and surpluses from China keep pouring into U.S. Treasuries to the tune of $80 billion to 100 billion per month, interest rates will not rise much.

But if these capital flows slow substantially or stop, perhaps due to political issues, then with our large national deficits, interest rates will rise sharply and the housing bubble will pop, due to the high percentage of heavily leveraged mortgages and variable rate mortgages.

Somehow, I feel it is not a question of if but when. As Larry Fish, chief executive officer of Citizens Bank, said at a recent breakfast at St. Anselm College, it is all very fragile. I couldn’t agree more.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at wbn@nortonnewengland.com.