For the past couple of years, the quarterly release of the Federal Reserve Flow of Funds data has been cheered because it has shown a sharp rise in household wealth, particularly of financial assets. We agree this is good news, but the aggregate headline numbers are incomplete.
It is crucial to think carefully about the distribution of these wealth gains. We have already shared some thoughts on the distribution of housing wealth gains — see our last post. But we also wanted to address the rise in financial asset values such as the stock market.
An indisputable fact is that the distribution of financial assets is heavily skewed to the rich. In fact, the top 20% of the wealth distribution owns over 80% of the financial assets in the economy! So when the aggregate Flow of Funds data show a rise in financial asset values, it is important to remember that the rise primarily benefits the rich. Here is the fraction of total financial assets held by the top, middle, and bottom quartile of the U.S. population in 2010.
Why might this matter? Our own research shows that the spending of poorer households is more . . .
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The Federal Reserve reported yesterday a continued rise in home values, offering a boost to household wealth. From 2006 to 2011, housing wealth fell from $23 trillion to $16 trillion, a loss that devastated the U.S. economy. Our research estimates that almost half of the decline in spending during the Great Recession can be attributed to the decline in house prices.
So the rise in housing wealth–reported to be back up to $19.4 trillion–must be great news for household spending, right? Well, unfortunately, the story is a bit more complicated. The rise in housing values over the past two years has been unconventional, driven by a strong price rebound in foreclosed properties and increasing participation by investors. This is not your 2002 to 2006 housing boom–it is fundamentally different, and therefore unlikely to fuel household spending to a significant degree.
The macroeconomic data may hide this fact, but a look at the microeconomic data makes it more transparent. Below, we provide charts based on city-level data, where we look at the relation between house price growth, the share of purchases by investors, and foreclosures. City-level data help us see why house prices are rising. For example, house prices in Phoenix, . . .
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