A $6.9 trillion 'wealth shock' is cracking Americans' nest eggs

A downturn in housing - likely by a surge in mortgage rates to the highest since 2009 - threatens wider reverberations. PHOTO: BLOOMBERG

NEW YORK (BLOOMBERG) - Just as the United States is learning to live with the virus and spending shifts back towards pre-pandemic normal, it faces a new threat: a plunge in wealth since the start of 2022 that JPMorgan Chase & Co estimates totals at least US$5 trillion (S$6.9 trillion) - and could reach US$9 trillion by year end.

So far, the richest Americans have borne the brunt, with US billionaire fortunes down almost US$800 billion since their peak amid the sharp losses in stocks, crypto and other financial assets.

But surging interest rates are also starting to rattle the housing market, where middle- and working-class families have the bulk of their wealth.

It all adds up to the sudden removal of a major prop to confidence: ever-bigger nest eggs. And it is by design. To stamp out the highest inflation in decades, the Federal Reserve needs Americans to curb their spending, even if it requires an economic slowdown to get there.

Americans' collective net worth had been climbing at a dizzying rate for the past two years, even as families and businesses contended with the ravages of Covid-19. Households piled up an extra US$38.5 trillion from early 2020 to the end of last year, bringing their collective net worth to a record US$142 trillion, the Fed estimates.

"It is painful to get back to normal after really being in a fantasy world last year," said Mr John Norris, chief economist at Oakworth Capital Bank. "It is going to feel a lot worse than it actually is."

Since the start of the year, the S&P 500 Index is down 18 per cent, the Nasdaq 100 has lost 27 per cent and a Bloomberg index of cryptocurrencies has plunged 48 per cent.

That all amounts to "a wealth shock that is set to drag on growth in the coming year", JPMorgan economists wrote in a note last Friday (May 20).

Fed chair Jerome Powell and his colleagues have repeatedly said they are actively aiming for such a slowdown, leaving it unlikely that policymakers will move to address the great wealth drop of 2022.

Billionaires were the biggest winners of 2020 and 2021. Now, they are losing more than almost everyone else. The Bloomberg Billionaires Index, a daily measure of the wealth of the world's 500 richest people, has dropped US$1.6 trillion since its peak in November.

Leading the way are the Americans on the index, who have lost US$797 billion since their peak. Perhaps the most humbled by it all is the world's richest person, Mr Elon Musk. He has lost US$139.1 billion, or 41 per cent of his wealth, since November, when his net worth briefly surpassed US$340 billion. Amazon.com founder Jeff Bezos, the second-richest person, lost US$82.7 billion, or 39 per cent of his peak wealth.

While the wealth losses among the top 0.001 per cent reduce inequality, that will not be much comfort to most people who worry about the US' widening disparities.

"In a relative sense, it is going to make the inequity a little lower - but in an absolute sense, everyone suffers," said Professor Reena Aggarwal, director of Georgetown University's Psaros Centre for Financial Markets and Policy.

Like many, Prof Aggarwal is concerned that falling markets will create problems for the broader economy. "Some correction was needed, but this is a pretty huge correction and it is not stopping," she said.

A downturn in housing - made likely by a surge in mortgage rates to the highest since 2009 - threatens wider reverberations. Over the last decade, the robust real estate market has added US$18 trillion in market value to owner-occupied home valuations.

US spending has been lifted in recent years by owners tapping the enhanced values of their homes for cash. The practice of home equity extraction likely came to a halt this year. More than 40 per cent of refinancings in the final quarter of last year saw home owners pull cash out of their homes.

Real estate is far more evenly distributed than financial wealth. The top 1 per cent owns more than half of US holdings of stocks and mutual funds, and the bottom 90 per cent owns less than 12 per cent, according to Fed estimates. By contrast, in real estate, the bottom 90 per cent owns more than half of the total, while the top 1 per cent holds less than 14 per cent.

"Higher home prices and sharply higher mortgage rates have reduced buyer activity," National Association of Realtors chief economist Lawrence Yun said in a statement last Thursday. "It looks like more declines are imminent in the upcoming months."

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