Hardly a Dent: How Household Wealth Is Escaping the Selloff

Summary

• The recent market weakness seems to have had limited impact on household wealth.
• This is because the average household holds as much wealth in real estate as in stocks and bonds, and strength in the former has offset weakness in the latter.

Market Implications

• Monetary policy tightening will have to be much more aggressive to tame a real estate market still on fire and engineer a negative wealth effect.
• This highlights the bluntness of Fed policy instruments and the risks of hard landing.

The Market Rout Has Hardly Dented Household Wealth

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.

But how?

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.

It Makes a Difference If You Are Rich

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.

Why This Matters for the Fed

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.