NCPA - National Center for Policy Analysis

Are U.S. Households Selling Stock?

July 20, 1998

Investors from abroad, rather than Americans, have been the big net buyers of U.S. financial assets over the past year or so, according to an analysis of Federal Reserve flow-of-funds data.

The analysis, by Joseph Carson of Deutsche Bank Securities, undercuts the commonly held belief that small American investors are helping guide asset levels ever higher.

  • Last year, foreigners snapped up some $350 billion worth of assets -- and they have apparently stepped up purchases in 1998.
  • Although U.S. households poured some $220 billion into mutual funds and even more into 401(k) plans last year, they sold such massive amounts of directly held stocks and bonds that total net sales of financial assets by households last year ran close to $200 billion -- a trend that also shows no signs of slackening.
  • Americans are apparently putting that money into housing -- with new financial flows into residential real estate last year totaling $260 billion, and net flows into housing this year appearing to be running some 25 percent to 30 percent faster.
  • In 1982, the cost of buying 100 shares of each of the stocks in the Dow Jones Industrial Average was about 1.75 times the price of an average home -- a ratio which by the end of last year had risen to 8 to 1.

So that increase has tended to make homes seen dirt cheap in comparison to equities.

Moreover, existing home prices have recently been rising at 6 percent a year -- more than the yield on a five-year Treasury bond. Also, the new tax laws, which allow a homeowner to realize $500,000 worth of capital gains on home sales every two years, are a powerful investment incentive.

Source: Gene Koretz, "Americans Turn to Real Estate," Business Week, July 20, 1998.

 

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