Household and Corporate Balance Sheets: A Closer Look

Economic Pulse
September 20, 2016

Heidi Learner

Heidi Learner

Chief Economist

Amid concerns over a slowing economy as well accommodative monetary policy that has left interest rates near 30-year lows, we look at how corporate America and the private sector have fared recently, focusing on balance sheet changes and in particular, changes in real estate values.

Have households grown wealthier?

In aggregate, yes. Household net worth (which also includes the net worth of the non-profit sector) rose by 3.1% YoY to $89.1T in Q2 2016, boosted by gains in real estate. Surprisingly, the value of households’ equity holdings—mutual fund shares and equities held outright—fell by 2.1% YoY, despite a 1% gain in the S&P 500 over the 12-month period ending June 2016. Instead, the gain in household net worth was spurred by a continued rebound in residential real estate. Owners’ equity in household real estate (the market value of household real estate less home mortgage debt) as a percentage of the market value of household real estate now stands at the highest level since September 2006.

Household Net Worth and Owners' Equity in Real Estate,
Not Seasonally-Adjusted

Flow in Household Mortgage Debt and Consumer Credit,
$B (Seasonally-Adjusted at Annual Rates)

The increase in household wealth has been accompanied by a rebound in household liabilities. In addition to the expansion in mortgage borrowing, debt used to fund other purchases, such as goods and services has also risen. Since 2012, more than 80% of the increase in consumer credit has come from just two sources: auto loans and student loans.

How have corporate balance sheets changed?

Nonfinancial corporate businesses have made use of the Fed’s low rate environment to re-leverage their balance sheets, largely to repurchase equities. In 2014 and 2015, companies were net re-purchasers, rather than issuers of stock, with negative net issuance of -$392B and -$563B, respectively. During the first two quarters of this year, net equity purchases totaled an even greater $654B (annualized), as corporate debt issuance continued to fund the purchases. In 2014 and 2015, corporate bond issuance totaled $270B and $401B, respectively, and the figure has jumped to an annualized $412B year-to-date.

Nonfinancial Business: Liability Flows
$B, Seasonally Adjusted at Annual Rates

The net worth of nonfinancial corporate business has increased too, rising $659B over the first two quarters of 2016, on the back of an increase in the market value of their real estate. Holding gains on real estate rose by $1.33T in 2013, $1.04T in both 2014 and 2015, and rising, albeit at a slower rate, by a further $266B during Q1 and Q2 2016.

Who’s been financing commercial real estate?

After the dearth of commercial real estate funding during 2009-2012, lending has rebounded, totaling $92.9B in 2014, $132.5B in 2015 and is now running at an annualized $123B during the first two quarters of 2016. While U.S. banks comprise the majority of lenders, life insurers have become an increasingly important source of funds. Between 2000 and 2007, life insurers never made up more than 8% of the source of new commercial mortgage assets. However, since 2013, life insurers have funded between 16% and 32% of total commercial mortgage borrowing—a significant increase, even as the overall level of borrowing is lower than it was a decade ago. Given that Dodd-Frank risk retention rules take effect in December 2016, it’s likely that life insurers and other-non bank institutions with the ability to warehouse risk on-balance sheet will become more important in commercial mortgage lending going forward.

Who's Lending? Flow in Commercial Mortgage Assets
$B (Seasonally-Adjusted at Annual Rates)

Heidi Learner

Heidi Learner

Ms. Learner analyzes the macroeconomic and legislative environment affecting commercial real estate markets on a national and regional basis and develops real-time measures of supply and demand for commercial space.