"The Potential Risks of Revaluation: Understanding the Challenges Faced by US Households"

In this eye-opening article, we delve into the unsettling risks associated with revaluation, shedding light on the potential consequences that could befall US households. US household net worth has surged by an impressive 42.85% since December 2018, reaching a remarkable $149 trillion from $104 trillion. It is noteworthy that out of this substantial $45 trillion increase, revaluation effects accounted for a significant impact of $32.7 trillion, with financial assets contributing $19.6 trillion and nonfinancial assets, mainly real estate, contributing $13.1 trillion. The increase in credit lines and junior lien loans, combined with the effects of revaluation, sets the stage for a looming threat of financial default. While the initial surge in household net worth may seem promising, a closer examination reveals an undercurrent of concern and apprehension.

The surge in paper wealth has fueled households' inclination towards leveraging their assets. One popular approach is tapping into the increased valuation of homes and the scarcity of new housing supply to secure funding. Between 2019 and Q1 2023, US households obtained approximately $2.6 trillion in home equity credit lines and junior secured loans. This influx of funds has not only further inflated financial assets, as a significant portion was invested in bonds and corporate equities, but it has also elevated the risk of household defaults in the event of a sudden rise in interest rates. This scenario could lead to higher mortgage and loan payments, potentially reducing home valuations.

After a span of over two decades, a remarkable occurrence has taken place: the mark-to-market effect of financial holdings for households has witnessed an annual increase exceeding 6% for three consecutive years. This notable development can be traced back to 1997 when the tech bubble created a significant surge in household net worth. Fast forward to the present, with the IT sector assuming a dominant role and the rise of AI, the stock market is reaching unprecedented heights. This unique event underscores the significance of these technological advancements and their profound impact on household wealth accumulation.

The Global Financial Crisis (GFC) of 2007-2008 serves as a reminder of the negative impact that revaluation can have on both stocks (approximately $7 trillion) and real estate ($6 trillion), leading to a significant number of consumer defaults. While the absolute revaluation figures for the three years preceding 2007 were relatively small compared to the period from 2019 to 2022, households began defaulting even when yields were nearly halved in 2007 compared to the previous year.

Although both stocks in 2022 and real estate in Q1 2023 suffered revaluation losses, these losses were minor compared to the accumulation of paper wealth over the past three years. However, a simultaneous correction of 5% to 10% in stocks and real estate in 2023, or a significant correction in real estate alone, can put households in a precarious financial position. This is due to higher interest charges and the activation of the loan-to-value (LTV) cap. Unlike equity markets, real estate revaluation typically takes time, with a lag of 15 to 18 months between publicly traded REIT and private real estate valuation adjustment.

In the event of a Federal Reserve rate hike resulting in increased unemployment and a slowdown, or even a slight reversal, in wage growth, these factors could amplify the revaluation effect, further impacting households' financial stability.