The latest financial data for the United States from the Federal Reserve show that household wealth has again reached a new record high. Yet, not all is well with household finances. Households also face increasing finanical risks from investing too much in housing and stocks, for example. As has been the case in the past, people may ignore those mounting risks and end up making decisions that they ultimately come to regret. These could include stretching their budgets to buy a bigger house or retiring sooner than they otherwise would have. Let’s start with the trend in household wealth. Total household wealth – the difference between all assets that households directly and indirectly own and all debt – amounted to 700% of after-tax income in September 2018. This is the highest ratio of wealth to income since the Federal Reserve kept quarterly data going back to 1952. It is also a sharp recovery from the depths of wealth after the Great Recession of 2007 to 2009, when wealth amounted to only 534.4% of income in the third quarter of 2011. Wealth To Income Ratio Reaches Record High Much of that recovery has come from a run up of stock prices and, to a lesser degree, in house prices. A growing share of what households own is then held in stocks and houses. , just before the Great Recession started. Households Increasingly Exposed to Stock and Housing Market Risks But what goes up must come down. Stock and housing prices tend to move in large swings around long-term trends. The stock market and also the housing market have been on a tear for several years. . When that happens, households will again have too much of their hard earned money at stake and could lose out on years of decent retirement income. The other source of risk for household wealth is debt. When financial markets crash and labor markets tumble, which often happen at roughly the same time, households are still left with their debt. They just find it a lot harder to pay for it as jobs become scarcer, for example. . For all of 2018, debt has basically kept pace with income. A ratio of debt greater than 100% of after-tax income is high by historical standards, although it is well below the records before the Great Recession. Debt To After-Tax Income Is Still High Not all debt is created equal, though. Mortgages have fallen slightly relative to income, while more costly debt such as student and car loans have increased. This means that many households pay dearly for their debt through high interest rates and fees. The changes in the composition of debt – from mortgages to student and car loans -- over the first nine months of 2018 are small, but they continue trends that started in the wake of the Great Recession. Just consider what has happened to non-revolving consumer debt – mainly student and car loans – in recent years. In September 2018, it amounted to 18.6% of after-tax income. This ratio has grown since June 2010, when it was only 14.5% of after-tax income. September’s level is close to the highest ratio on record, dating back to 1968. The continued growth of student and car loans in 2018 is especially remarkable since after-tax income jumped in early 2018 due to the tax cuts that came into play in January. That is, debt as a share of after-tax income already declined due to the tax cuts and people still borrowed at a faster pace than their incomes grew. Non-Revolving Debt -- Student and Car Loans -- Near Record Highs To be clear, these data refer to average household wealth, asset allocations and debt. Many households have little or no wealth, do not own their own house nor any stocks, nor have much debt. This is especially true for non-whites or Latinx families. The aggregate data, though, capture the mounting financial risks for many middle-class households, especially those who own a home but who have little savings outside of it or those who owe costly debt. Often non-white or Latinx families find themselves in such precarious financial situations. Many of the financial risks that show up in the aggregate numbers then could disproportionately impact those families that already experienced large wealth losses in the last downturn. Households face increasing financial risks from a concentration of their savings in risky investments and from still high and rising debt levels. Generating real retirement security will require more policy attention to the risks that household face with their wealth. That is, policymakers can and should do more to help households avoid costly financial mistakes.
US middle-class household wealth reached 102.3% of after-tax income in September 2018, the highest level since 1952, writes Christian Weller, senior fellow at the Center for American Progress. He said that growing numbers of US households held their wealth in stocks, which have experienced high volatility recently, while levels of costly debt, such as student and car loans, reached 700% of after-tax income by September this year. Weller said the risks of people incurring financial losses were growing, and called on politicians to do more to protect people from making "costly mistakes".