According to a March report by the U.S. Federal Reserve Bank, a booming stock market and rebounding home prices set a new record for American wealth last quarter; however income inequality is now at its greatest since before the Great Depression.
Household wealth is the value of assets including homes, securities and bank accounts less debt. During the last quarter household net worth jumped nearly $3 trillion to $80.7 trillion. Investment portfolios in stock and mutual funds increased 9 percent, nearly $1.7 trillion.
Although national home prices remain 17.3 percent below their April 2006 peak, they rose 12 percent in 2013 alone, the greatest gain in eight years. Some metro areas saw single-year price gains of 20 percent. Home equity has now touched 51.7 percent, the highest since before the recession and a substantial gain from the record low of 36.5 percent in 2009.
American households now hold $19.4 trillion in real estate. It’s been five years since the stock market fell by 50 percent on Mar. 5, 2009 reaching its nadir in this cycle on Mar. 9. Since then the Standard and Poor’s 500 index has soared 175 percent, and the Dow Jones Industrial Average has climbed 150 percent hitting an all time record. The NASDAQ has more than doubled by 235 percent. Sam Stovall, at S&P Capital IQ, noted that less than a third of bull markets since World War II have lasted for six years. How long will this one charge ahead?
These gains have not accrued evenly. About 10 percent of the population owns 80 percent of all the stocks. Life insurance accounts for $19.4 trillion in household assets. Pensions make up $19.6 trillion, including $8.5 trillion in government pension entitlements, $5.7 trillion in IRAs, $4.9 trillion in 401(k) plans and $3.1 trillion in private pensions. It’s worth noting that of the $80.7 trillion of household wealth only 13 percent, $10.6 trillion, is in 401(k)s and IRAs, a dismal retirement savings rate for the private sector compared to that of government employees who make up only 14 percent of the workforce.
From the numbers, it’s evident that the main way that the private sector accumulates wealth is to buy a house. The last recession showed the risks of that approach. Since home equity is the private sector’s most popular investment, expect baby boomers to tap that equity through reverse mortgages as they retire.
Income inequality increases
Compared with other advanced economies, the U.S. has higher income inequality and the difference has been getting more pronounced. According to a University of California Berkeley study by professor Emmanuel Saez, income inequality in the United States even surpasses 1928, the peak of the stock market bubble in the Roaring ’20s. The top 1 percent gets 22.5 percent of the nation’s pretax income while 9 out of 10 Americans have to divide less than half of the nation’s income. When it comes to the bottom 20 percent, its net worth is negative, according to a study by Professor Edward N. Wolff of New York University.
A Brookings Institution study showed that income inequality is most pronounced in cities, especially Atlanta, San Francisco, Miami and Boston. Here, households in the top five percent earned at least 15 times the income of those in the bottom five percent. Wealth inequality is even more striking. NYU’s Wolff showed that that the richest fifth held 88.9 percent of the nation’s wealth.
President Obama is making income inequality a focus of his second term. “Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled,” Obama said during his 2014 State of the Union address.
After New York City Mayor Bill de Blasio’s recent win due to his “Tale of Two Cities” income disparity campaign, expect income inequality to become a major issue as the country approaches fall elections.