By: Pierre G. Villere
The expanding wealth gap in America may explain why Bernie Sanders and Elizabeth Warren have centered their presidential campaign messages on this topic. Indeed, after studying these metrics, I was surprised by what I found.
Taking on a mortgage to buy a house that could appreciate, or borrowing for a college degree that should boost earning power, can be wise decisions. However, borrowing for everyday consumption, or for assets such as cars that lose value, makes it harder to save and invest in homes that tend to create wealth.
Hitting a Double. The U.S. economy roughly doubled in size from 1989 through 2016, data from the U.S. Bureau of Economic Analysis show. Counted together, everyone got wealthier. But gains in assets owned were heavily skewed toward the highest earners, according to a recent Fed survey.
The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. Yet for households in the top 20%, median net worth more than doubled to $811,860, and for the top 1%, the increase was 178% to $11,206,000.
Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain, or $19 trillion, went to the wealthiest 1%, according to recent Fed data.
But in contrast, it appears the American middle class is falling deeper into debt to maintain a middle-class lifestyle. Cars, college, houses and medical care have become steadily costlier, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of credit into nearly every corner of the consumer economy.
Consumer Concern. Consumer debt, not counting mortgages, has climbed to $4 trillion, higher than it has ever been even after adjusting for inflation.
Mortgage debt slid after the financial crisis a decade ago, but it is rebounding; student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages; and auto debt is up nearly 40% adjusting for inflation in the last decade to $1.3 trillion. The average loan for new cars is up an inflation-adjusted 11% in a decade, to $32,187, according to credit reporting agencies.
Unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big banks for borrowers and loan volume. The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving.
It has reshaped both borrowers and lenders, as consumers increasingly need credit, companies increasingly can’t sell their goods without credit, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit. It’s a vicious circle.
Confidence. But counting all kinds of debt, including mortgages, consumers aren’t nearly as debt-burdened as they once were. In the fourth quarter of 2007, the last year before the financial crisis struck, households devoted 13.2% of their disposable income to debt service. In the first quarter of 2019, that number was 9.9%, largely due to low interest rates.
History tells us the growing consumer debt is a vote of confidence in the future. People borrowing money today expect to have the income tomorrow to pay it back, so consumer debt tends to rise when borrowers feel secure in their jobs.
But the increase in non-mortgage debt of all types, including student and auto loans, puts the middle class one step farther away from homeownership.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.