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June 6, 2008
Fed Tries To Fight The Flows
Paced by a steep decline in real estate and equity prices (and/or mutual funds), the net worth position of the U.S. household sector dipped by $1.69 trillion in the first quarter of 2008 (Flow of Funds). Fed officials, often quick to point out that ominous consumer debt loads and unsustainable spending trends are supported by the consumer’s strong net worth position, have yet to comment specifically on yesterday’s statistics. Perhaps they are busy trying to conjure up more new policies aimed at supporting the consumer’s balance sheet?
1Q08 marks the second quarter in a row that real estate and stocks (or stocks and mutual funds) have posted declines in unison. For those wondering, the last time this happened was back in 1974.
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From 4Q02 to 3Q07 $20.2 trillion was added to household net worth (or about $1 trillion per quarter). This easily beats the $17.5 trillion that was added for the 20-quarters ending 1Q00 (or the stock market bubble). In other words, on a very simplistic level the real estate bubble years were more of a boom to households than the stock market bubble years. Also to note, $5.79 trillion was erased from household stock and mutual wealth during the 2000-2002 bear market while real estate wealth actually increased by $2 trillion during the same time.
Question: if U.S. household real estate wealth, which increased by $8 trillion from 2000 to 2Q07, is amidst a serious decline, can any asset class can rise to help cushion the fall?
The obvious answer is definitely not. After all, it is highly unlikely that the current real estate bust - which has only erased $520 billion from household wealth so far (1Q08) - can be the launch pad for a stock market rally (stocks are the only other major asset class other than real estate that U.S. consumer’s own).
In short, money is flowing out of real estate, out of stocks, and out of mutual funds. Is it any wonder that the Fed finally snapped in March?
To note: history may be made when the 2Q08 statistics are released in September. The flows statistics have never logged a three quarter decline in real estate and stock prices at the same time.
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