Hardly a Dent: How Household Wealth Is Escaping the Selloff
(3 min read)
(3 min read)
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Despite pronounced equity and bond market weaknesses, the impact on household wealth has so far been limited. Indeed, Macro Hive calculations based on the composition of household assets at end-2021 from the Fed financial accounts imply that average household asset values fell only about 2% between December and end-April.
The answer comes down to what household wealth comprises: a share of equities and bonds in household wealth that is roughly equal to the share of real estate. And the weakness of the former has been offset by the strength of the latter.
The level and composition of assets and therefore the impact of the market weaknesses vary by household income. Table 2 shows that households in the top 1% income bracket hold about half their assets in stocks and bonds and only a tenth in real estate. Meanwhile, the reverse is true of households in the bottom 20% of the income distribution.
As a result, based on our calculations, only households in the top 20% of the income distribution have seen a decline in their wealth (Table 1). By contrast, households in the bottom 80% of the income distribution have seen no discernible change in wealth.
Engineering a decline in wealth without a weakening of the real estate market seems difficult given the large share of real estate in household wealth. Furthermore, residential real estate is also one of the few demand components sensitive to interest rates. So lowering inflation back to 2% will likely require cooling the housing market.
But the housing market remains strong. It has double digit price appreciation, very low inventories and excess demand. The gap between price appreciation and mortgage rates suggests market weakening would likely require much more forceful tightening by the Fed than currently envisaged (Chart 2).
Such tightening would also have a negative impact on equity and bond markets, which highlights that monetary policy is a blunt instrument. Taming the real estate market without bringing down the whole economy seems a tall order for the Fed.
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