Household Balance Sheets: Fiscal Cliff Impact

During the fourth quarter of 2012, household balance sheets improved with increases in home values and reductions in mortgage debt, thereby boosting household net worth. These are favorable improvements that will help housing demand in 2013.

However, since the end of the Great Recession such developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, the data do not show this impact for the last quarter of 2012.

The graph above plots the current value of net worth to disposable personal income (NW / DPI) and the corresponding 25-year historical average (1982-2007). The dashed blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts. 

While there has been a general trend of an increasing NW/DPI ratio since early 2009, there have been ups and downs in this process due to stock market and other asset value fluctuations. As of the fourth quarter of 2012, the NW/DPI measure stood at a value of 5.43, above the historical level of 5.24 and significantly higher than the cyclical low of 4.8 set during the beginning of 2009.

Unlike most periods after the Great Recession, the ongoing improvement in balance sheets did not result in a decline of the savings rate at the end of 2012. In anticipation of higher tax rates, particularly on dividend income, the amount of income paid out and earned by American households jumped. As this accelerated income was due to a one-time cause, spending did not increase at the same rate. Thus, with a rise in income and no corresponding increase in spending, the personal savings rate increased to 4.6% in the fourth quarter, marking the highest rate of savings in a year and a half.

The data for the first quarter of 2013 will also show a Fiscal Cliff impact, as income will temporarily fall due to the accelerated payments made at the end of 2012. That result, plus the end of the payroll tax cut, will boost the NW/DPI measure and muddy our tracking of balance sheets until the data for the second quarter of 2013 are available.

Nonetheless, Flow of Funds data from the fourth quarter of 2012 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 11% or $1.2 trillion. The value of real estate owned by households has fallen by a net 12% over the same period, but has now risen for the last four consecutive quarters for an increase of $1.4 trillion.

As a result, total household equity as a share of real estate value has increased to almost 47% as of the end of 2012.