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Strategies & Market Trends : The Residential Real Estate Crash Index
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From: Elroy Jetson10/22/2004 4:28:04 PM
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. WEALTH ILLUSION .

The rise in household net worth in recent years has largely resulted from inflating prices of corporate equities in the late 1990s, and residential real estate in the past four years. But this rise in household wealth is illusory. The true measure of an increase in the wealth of a nation is the growth in its capital stock. In recent years, growth in our capital stock has slowed and the composition of the slower growth has moved in favor of McMansions and SUVs, which do little to increase the productive capacity of our economy.

In his remarks about household indebtedness to a community bankers convention on October 19, Fed Chairman Greenspan was in his usual Panglossian mood – not to worry. What especially caught my eye was the following sentence in his prepared text:

Despite the recent high debt-to-income ratios, at least some of which is more statistical than real, the ratio of households’ net worth to income has risen to a multiple of more than five after hovering around four and one-half for most of the postwar period.

Chart 1 is a graphical representation of the net worth/disposable personal income ratio to which Greenspan referred. And, indeed, since the mid 1990s, there appears to be a “new era” for the ratio of household net worth relative to after-tax income – a new era even after the end of the new era in U.S. equities.

Continued __ northerntrust.com

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