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Is household wealth overvalued?

Fluctuations in household net worth relative to income


When economists look at household wealth, they’re often concerned about the individual assets that make up that wealth—specifically, that they may be overvalued. Thankfully, FRED has an indicator to help us evaluate household wealth: The ratio of household net worth to disposable personal income. This ratio remained nearly constant for 50 years before the dot-com bubble (roughly 1994-2000), when it started increasing. And an increasing ratio may signal that the assets underlying net worth are overvalued. Since 2017, household net worth relative to income (dashed blue line) generally has been above its previous record level from the year before the Great Recession.

We also include the value of financial assets, a component of net worth, relative to income (solid green line). Most variations in net worth relative to income are associated with changes in the value of financial assets, which is indicated by the way the two lines track closely together in the graph. Even when housing values were collapsing and net worth fell (from $6.64 billion to $5.25 billion, or 1.4 times disposable income), the decline in the value of financial assets was 50% of that decline in net worth (from $5.07 billion to $4.37 billion). In terms of the recovery of net worth relative to income, which didn’t start until late 2012, we see again that the majority (65%) is accounted for by the rise in the value of financial assets.

How this graph was created: Search for “Household net worth” and select  “Households and nonprofit organizations; net worth, Level.” From the “Edit Graph” panel, use the “Customize Data” option to search for “Disposable Personal Income” and select the quarterly series in billions of dollars. After adding this series, enter “a/b” in the “Formula” box. This will show the ratio of household net worth to disposable income. To add the second line, use the “Add Line” option to search for and add the series “Households and nonprofit organizations; total financial assets, Level.” Then repeat the same process of dividing by disposable personal income.

Suggested by Ryan Mather and Juan Sánchez.

View on FRED, series used in this post: DPI, TFAABSHNO, TNWBSHNO


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