Remember that election thing a year or so back? With the “are you better off than you were four years ago?” questions?
Although it’s a formulation that usually refers to the last leap year, nothing is stopping your favorite Personal Finance blog from bringing up the topic in an odd numbered year. And what, you may ask, inspired this piece?
Well, month old data on the Net Worth of individuals, of course! Let’s dive in…
Has Your Net Worth Increased Since 2007?
Remember those halcyon days back in 2007 – back before the average person had ever heard of “QE” (don’t u’s usually come after q’s?) or “Moral Hazard”? When the United States had large investment banks? Before we encoded banks and large firms as “Too Big To Fail” by law? (Sorry, Systematically Important Financial and Nonfinancial companies)
Anyway, the Federal Reserve releases some net worth figures every quarter. Back in 2007, in the third quarter, Households and Nonprofit Organizations claimed $68,056,600,000,000 in net worth. That’s ‘trillions’, for the uninitiated.
Pretty high peak? Maybe so – but we just blew through that barrier. $70,349,120,000,000 is the new high water mark… and with the continuing recovery so far in the 3rd (and yes, the recently ended second) quarter, expect to see that make a few more highs:
About the ‘Wealth Effect’
Back in 2007, there was another short phrase making the rounds – something called the ‘Wealth Effect’. In theory, the wealth effect would refer to an increase in spending on the back of a perceived (or actual) increase in wealth. Let’s let the Economists (that party I’m not invited to – ask Cameron) fight that one out – but let’s talk about housing wealth effects.
In California, it was sort of an accepted joke/dismissal to refer to tapping home equity as ‘Going to the ATM’. Many foreclosed houses in the Bay Area (in the aftermath of the Great Recession) had 2 or even three mortgages, as homeowners converted home equity to more liquid forms of cash.
Now, that’s not to say that tapping home equity is automatically a bad idea. Consider that having a mortgage and contributing to a 401(k) at the same time forgoes paying down a bit more equity. In essence, shifting away from equity is really just changing liquidity… your net worth doesn’t change (well, short of the cost of borrowing), and you may be able to make more money in other asset classes than the interest on your mortgage.
The issue, of course, comes when you are in the accumulation phase of your career. The temptation of increasing wealth, which can sometimes feel ‘unearned’ (see: any lottery article on this site) is to tap equity and spend it on things that aren’t so great. $100,000 cash out? Buy a new SUV? Go on vacation? Well, no – but, pay down higher interest rates? Perhaps even invest? Maybe.
So, it remains to be seen what effect the uh, wealth effect, has on our current economy. With a brightening economic picture juice consumer spending? Will it amp savings? Have people learned from the housing wealth effect of 6 years ago?
Are You Better Off Now?
That leaves the question for you, dear reader. Has your net worth increased since the beginning of 2007? Since 2009? (I hope so, heh). What do you think about the new peaks in wealth?