Behind the rapid run-up in U.S. stock prices in the 1990s lies a historic change: Stocks are replacing homes as the primary nest egg for many American families, according to economists and market analysts.
With the upward march of stock prices in this decade, when the Dow Jones industrial average has doubled to 5000 and other indexes also have surged, the value of U.S. stocks held by Americans now exceeds $5 trillion, Dean Witter chief economist Joseph Carson said. Using Federal Reserve Board statistics, Carson estimates the equity Americans have in their homes totals $4.5 trillion.
This change also reflects the slowing of inflation in house prices and a tremendous flow of cash into mutual funds and retirement plans, which in turn has helped push the stock market higher.
“This is an astonishing, long-term asset shift away from residential real estate and toward stocks,” said Carson, who prepared a research report on the subject.
Other economists confirm the trend.
“Households continue to put a larger percentage of assets into the stock market,” said Daniel Bachman, senior economist at the WEFA Group, an economic forecasting and consulting organization. “This is a shift of historic proportions in that the future composition of household wealth is changing dramatically and will not return to the pattern of the 1970s and 1980s, when residential real estate was such a large part of household wealth.”
There are no definitive current numbers about how many American households have more money in stocks than in real estate. Stephen Zeldes, professor of finance at the Wharton School of the University of Pennsylvania, said that in 1989, one-third of households held shares either directly or indirectly, while in 1992, 40 percent did.
“I suspect the number is higher today,” Zeldes said. “Mutual funds have risen in popularity in the past three years. Some of that includes people who had not previously been owners of stock.”
His calculations do not take into account stocks held on behalf of workers in defined benefit pension plans.
From 1992 to 1994 the number of stock mutual fund accounts has climbed 79 percent, from 33 million to 59.1 million, according to the Investment Company Institute.
In much of the post-World War II period, Americans bought houses, saw them appreciate in price and later sold them to buy larger homes or to finance their retirement. During the 1950s and 1960s, the value of stocks and bonds held by American households was about equal, with stocks taking a slight edge in the late 1960s.
During the 1970s and much of the 1980s, residential real estate prices rose sharply because of inflation and buying pressure as members of the baby boom generation entered the market.
Today, boomers are increasingly looking to the stock market, not the housing market, to build the wealth they will need in retirement, according to John Tuccillo, chief economist for the National Association of Realtors.
“People have become more sophisticated and knowledgeable about the stock market and they are looking to stocks as savings vehicles more than they used to,” Tuccillo said.
The emphasis on stock purchases is expected to continue, analysts said. The WEFA Group is forecasting that the value of stocks held by American families will nearly double by 2001.
That assumes, of course, that there is no stock market crash of a magnitude that reduces both the value of Americans’ holdings and their appetite for investing more.
While few stock market analysts predict such a decline, some say occasional corrections - short-term retreats in stock prices - can be expected.