Household wealth at record level

Each quarter the Federal Reserve issues a report on household wealth. The most recent report covers the third quarter of this year, and the figures show that household wealth has surpassed previous levels. With the stock market currently at a record high, the fourth quarter of the year should establish record levels for household wealth once again.

 

It should be noted that these figures are national in scope. With real estate strong in our local market, household wealth is increasing significantly in our area too.

 

It should be noted that these figures are in regards to total wealth. Most people realize that wealth tends to be concentrated. If someone does not own a home or stocks, chances are their wealth has not changed much.

 

Younger people are those who are least likely to be experiencing this recent build up in wealth. This is because most young people do not own significant assets, notably stocks and a personal residence.

 

The best way for a younger person to obtain wealth is by saving money. If someone just lives on a paycheck to paycheck basis, there is no savings being generated. With the unemployment rate relatively low and wages starting to increase a little faster, that makes savings somewhat easier.

 

The increase in real estate values in our local area creates a mixed picture. For someone who currently owns a home it is a positive, because there is an increase in wealth. However, for a younger person looking to buy a property it is a negative. This is especially the case when real estate prices have been increasing faster than incomes.

 

For those who are the beneficiaries of this increase in wealth it is important not to become over confident. While the stock market and real estate will increase over long periods of time, there are plenty of years when both of these categories are not doing particularly well.

 

When someone has an increase in wealth, one should not dramatically increase their spending because of this. In years past some people took out home equity lines of credit, as their property values were increasing. However, some of these people got into financial difficulty when real estate prices weakened.

 

While many people would not perceive the economy to be doing particularly well, it is certainly stronger than it has been in recent years. With an improved economy this is a time for people to save more. This is especially the case for those whose livelihood is in more cyclical industries.

 

People need to realize that the economy has its ups and downs. While it is certainly not likely that we will experience another recession like the one in 2008 and 2009 anytime soon, we must remember that there will be another economic slowdown at some point again in the future.

 

It is human nature that people are more confident about investing when prices are rising. This is true in both the stock market and real estate. When prices are rising optimism abounds.

 

It is important to keep reasonable expectations with regards to investments. If corporate profits are rising 5% a year on average, it is not realistic to expect the stock market to be generating double digit returns over the long run going forward. Likewise in real estate it is not realistic to expect prices to increase significantly faster than wages on a long term basis.

 

Over time with a growing economy household wealth will establish new highs. However, this does not occur on a continuous basis. It is important for people who have experienced this recent increase in wealth to maintain reasonable expectations for the future.