How’s the US consumer?

Well, as ever, that depends on who you mean by “the US consumer.” If you mean middle-class and down the income ladder, the answer’s a Magic 8 Ball-esque “reply hazy, try again later.”

The Wall Street Journal summed it up pretty well in a late-February article. “The US economy depends more than ever on rich people,” a headline read. I dare say the Journal itself, if not perhaps the paper’s well-meaning staff writers, would have it no other way.

In that linked article, Rachel Louise Ensign noted that the top 10% of US households “are splurging on everything from vacations to designer handbags” courtesy of the windfall illustrated below.

The grey shaded area shows the cumulative gain in US household wealth since stocks bottomed in March of 2020. That sum was a staggering $58 trillion as of Q4 2024. (It’ll be lower once the Fed gets around to guesstimating the damage from Q1 2025’s equity market correction.)

Of course, all that’s irrelevant if you don’t own any assets. And a lot of Americans don’t, believe it or not. According to Moody’s estimates cited in the linked Journal article, the most well-off 10% of US families (among whom homeownership’s a given, and where a majority of corporate equities are held) now account for 50% of all spending, a record. They have $1.3 trillion more in savings than they did before the pandemic, four times the tally for the other 90% of American society.

That Journal article’s amusing, and you should read it. It highlights the extent to which Americans who aren’t actually rich in any real sense (i.e., they’re not going to be having lunch with Louise Linton) are able to live very, very well thanks to explosive asset price inflation post-pandemic. One family’s splurging on fancy cycling equipment, another couple’s buying planes and another hanging out with elephants on African safari, thanks in no small part to the pandemic bonanza in stock and property values.

So, those American consumers are doing quite well. But the fact that half of consumption in America now depends on perpetual gains for their assets is concerning. What if stocks stop rising, as they did in Q1? Indeed, the most recent consumer spending data was less than ebullient.

Thankfully, there’s always home equity and the legacy of low mortgage rates. “The majority of households have not been impacted by rising rates,” SocGen’s equity strategy team remarked, in a new note. I’ve highlighted the figures below previously, but they’re always worth another mention.

The figure on the right is just the NY Fed data on delinquencies. Virtually nobody’s late on their mortgage, and credit cards comprise just 7% of total debt. The figure on the left plots the effective rate on the nation’s mortgage stock with the prevailing 30-year fixed. The slow creep higher for the black line gives you a sense of how glacial this process is, particularly when home sales are slow. Colloquially: It’d take forever and a day for the effective rate on America’s mortgages to rise anywhere near 6%, let alone achieve a seven-handle.

That’s critical, because nearly three-quarters of total debt outstanding in America is mortgage debt. 70% of household liabilities are fixed-rate, and in some (a lot, maybe) cases, the return on cash and close equivalents (e.g., short-term, blue-chip corporate credit) is higher than the rate on that fixed-rate debt stock. That de facto arb’s still working to support consumption among Americans fortunate enough to own a home and have cash stashed in money market funds or other high-quality, income-generating financial assets.

There’s nothing “new,” per se, in any of the above, but it serves as a helpful reminder: The US economy’s kinda/sorta a Potemkin village. It’s built on consumer spending, and 10% of people now account for 50% of that spending. That’s brought to you in part by an anomalous setup wherein Americans with good credit and a little cash are allowed to lever up five and 10 times on homes at artificially-suppressed rates, fixed for what may as well be eternity. All the while, we’ve encouraged and facilitated a bubble in another asset (stocks) that’s overwhelmingly concentrated in the hands of people most likely to own the homes.

That’s worked out pretty well, most of the time, but the end result four decades on is about what you’d expect: A stupidly bifurcated society where the well-off are insulated (e.g., even if their stock holdings decline in value, their most important asset will at least keep up with inflation, and the structure of the loan for that asset’s such that three quarters of a given upper-middle-class household’s debt is immune to rising rates) and everyone else is more or less f-cked.

That’s suboptimal and arguably unstable, but it can persist as long as membership into the privileged caste is at least theoretically open to people who play by the rules and do everything “right.” The issue: America’s perilously close to that not being the case.

Homeownership’s increasingly closed off to people who would’ve easily qualified a mere five years ago. In my view, that’s a societal problem second only to the preservation of democracy for America. In other words: Once we (if we) rescue our system of governance, we need to get right to work making shelter not just affordable, but affordable to purchase, and by any means necessary. Lest we should condemn an entire generation to the dystopian, “YOLO” serfdom on display in apartments all across America, where Ophidia minis share counter space with rent notices.

Addendum

The US housing market suffers, in my view, from the legacy of good intentions gone awry. When you extend leverage at subsidized rates (i.e., mortgage rates distorted by the Fannie-Freddie backstop), you’re guaranteed to get a bubble in whatever that leverage is financing, particularly when the end result of the deal is an asset that carries a de facto US government guarantee. There should be a picture of the US mortgage market in the dictionary next to the entry for “moral hazard.”

When the resulting bubble bursts, you pretty much have to re-inflate it because everyone who got in at the latter stages is underwater on their most important asset. That’s no good, particularly when that asset’s four walls, a roof, a shower, a stove and two toilets. So, by and by, you do re-inflate it, but in order to do so, you double down on the subsidy (e.g., you make the leverage even cheaper on the excuse you’re — you know — extending it more responsibly this time by asking for things like proof of income before you loan half a million dollars to a stripper.)

That can’t go on forever, though. Not when the asset’s something people need, like shelter. If you keep that spiraling bubble dynamic going for an asset that people have to have, you’ll sow the seeds for disaster. Because unless regular people’s financial wherewithal outstrips, or at least keeps up with, the spiral, people will need lower rates, more leverage, a longer-tenor loan or all three, in order to afford it. If you oblige, you’re perpetuating the spiral, and as Aleksandar Kocic wrote in 2017, “spiraling leverage cannot continue indefinitely; at some point, the bubble becomes too big and cannot be subsumed by a bigger bubble as the damage of its burst would become irreparable.”

One more time: When the asset in question isn’t something everyone has to have, this needn’t be existential. But when the assets are homes, it can set the stage for societal unrest. If a shock comes along to amplify the price increases (e.g., a pandemic that distorts supply and demand beyond recognition), the situation can get away from you entirely and in a hurry, especially if, in a panic to respond, you f-ck up and triple down on the subsidy (i.e., the Fed’s ramped-up MBS buying), making the leverage all but free, and thereby creating a 90-degree-angle price inflection as free money chases a hopelessly limited pool of assets.