The net worth of American households surged to a new all-time high in the first quarter of 2021, buoyed by a faster than expected recovery of the US economy from the COVID-19 recession. Last week, the Fed reported that household net worth surged $6.7 trillion or 3.8% in first-quarter 2021 from fourth-quarter 2020 to reach $136.9 trillion. Wow!
Of the total increase of $6.7 trillion in household net worth in the 1Q of this year, $3.2 trillion came from equity holdings, while $1 trillion was due to the continued escalation in real estate values. The S&P 500 Index gained 7% for the quarter, and most forecasters predict more gains this year.
From a historical perspective, household net worth has nearly doubled from its level of a decade ago when the nation was still escaping the throes of the 2008-09 financial crisis. This time around, we are rebounding from the throes of the coronavirus pandemic and recession. And the current rebound is a whopper!
The US economy grew a stunning 6.4% (annual rate) in first-quarter 2021 buoyed by strong consumer spending. A sharp reduction in new coronavirus cases, nationwide COVID-19 vaccinations and the accelerating removal of economic and other day-to-day restrictions have resulted in a faster than expected reopening of the economy.
Meanwhile, the housing market has remained robust primarily due to record-low mortgage rates. The Fed adopted an ultra-dovish monetary stance and reduced its benchmark interest rate to near zero (0-0.25%) in March 2020. This move significantly reduced mortgage rates, enabling more consumers to buy houses. The strong demand has significantly strengthened the real estate sector. In fact, there is now a shortage of houses on the market.
As it turned out, the pandemic-led devastation of the US economy last year was not as severe as most forecasters expected. In fact, US household net worth actually climbed significantly in the second, third and fourth quarters of 2020 and first-quarter 2021, as noted above – after dropping 5.6% in first-quarter 2020. Of course, unprecedented fiscal and monetary support (stimulus checks, etc.) helped in reviving household net worth, despite the pandemic.
The best news is, the US economy is expected to grow at 6.5% on average in 2021 based on the latest surveys of forecasters, as the economy continues to rebound from the COVID recession with consumers flush with cash continue to spend. This demand should continue to be bullish for equity prices and real estate this year.
Question Is, How Long Can It Last
A year ago, no one thought the economy could be this strong by now. The economy plunged in the first half of last year due to the COVID lockdowns with consumers stuck in their homes. But then the economy exploded in the second half of last year with GDP growth soaring over 35% in the 3Q, thanks to generous government stimulus checks in consumers’ pockets.
No one predicted consumers could be spending this much. But here we are. Economic growth this year is projected to be the strongest in decades. This is despite widespread shortages of goods and services across the consumer spectrum.
The question is: How long can this economic boom last? I would say not long. Most economists agree the spending surge last year was due to a combination of pent-up demand from the COVID lockdowns and generous stimulus checks from the government and expanded unemployment benefits. I don’t see either of those being repeated in the near future.
Plus, we cannot ignore the fact that while average household net worth hit a new record high last year, household debt also hit another record high of $16.9 trillion at the end of last year – growing at a 6.5% annual rate, the fastest pace since 2006.
This point cannot be understated: While many American households have seen their net worth increase thanks to a long bull market in stocks and real estate, they have also taken on a lot more debt in most cases. This has become a fact of life, unfortunately.
As we all know, the bull market in stocks and real estate will NOT continue forever, but household debt does for the most part. Sure, some families pay down their debt from time to time, but this is becoming increasingly rare. Sadly, most households are increasing their debt as their net worth rises, and this is not a good sign for our long-term economic future.
Sorry to end on a sour note, but it is what it is.
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