Research Report on How the Affluent Are Doing These Days

Research & Markets has released its Spring Survey of the Richest Americans. So for those of you who are interested in how my friends at the club and I are doing, here you go.

The participants of this national survey included 467 men and women in households with an average annual income of $315,600, an average net worth of $3.1 million, average investable assets of $1.5 million, and an average primary residence value of $1.2 million. This is the 13th in a continuing series of twice-yearly surveys of the wealthiest 10% of U.S. households, based on net worth, as determined by Federal Reserve Board research.

Major Findings

Perhaps reflecting the stock market volatility and the turmoil in both the housing and credit markets in March, the index of 52 for current business conditions represented a sharp drop of 56 points from the Fall 2007 survey. This index is at its lowest level since Fall 2002, the historic low for this series of surveys. This index is consistent with the March Consumer Confidence Index of the Conference Board, which also declined sharply (down 12 points from the February survey) to its lowest level in five years.

The composite Affluent Consumer Expectations (ACE) 12-Month Economic Outlook Index of 102, while hovering near historic lows, still represents a modestly positive outlook overall, despite the negative index of 99 for future business conditions. The composite index essentially held even with the Fall 2007 survey due to modest increases in the indexes for business conditions and the stock market, the two other elements of the composite index.

Men are much more optimistic than women in their 12-month outlook for business conditions and the stock market while women are more optimistic in their outlook for household income. Historically, the degree of optimism, as indicated by the 12-Month Economic Outlook Index, generally strengthens as income, investable assets, and net worth increase. Such was not the case in this survey. A degree of cautious optimism for future economic conditions is exhibited across most of the demographic segments. Given their very negative opinion of current business conditions, the respondents may be indicating they do not feel economic conditions can become much worse and that they therefore expect to see some degree of improvement during the next 12 months.

Over half (55%) of the respondents indicated they had reduced or deferred expenditures in the past 12 months, would make a conscious effort to do so in the next 12 months, or had both done so in the past and would continue to do so in the future. Efforts to reduce expenditures in the past 12 months have been most prevalent among those under 60 years of age and those with net worth of under $1.5M. The segments that appear least likely to make expenditure reductions are the highest net worth group ($6M+) and those age 60+.

Almost half (45%) of the affluent market indicates they have not and do not intend to reduce or defer expenditures. In fact, they report plans to increase spending during the next 12 months in 11 of the 17 categories of products and services. These respondents, who are generally rather positive in their outlook for economic conditions during the next 12 months, differ from the other respondents in a number of other ways. They are a bit more mature (average 55 vs. 52), twice as likely to have no mortgage on their primary residence (32% vs. 16%), more likely to have a fixed rate mortgage (78% vs. 69%), have 50% or more equity in their home (80% vs. 59%), have about a third more average income ($365K vs. $275K) and average net worth ($3.7M vs. $2.7M), and 90% more in average investable assets ($2.1M vs. $11M).

Among the 55% of the respondents that indicated a conscious past and/or future effort to reduce expenditures, there was an average of 3.6 reasons for these actions. The most frequently cited reasons were “increased cost of every day goods and services” mentioned by almost two-thirds and “possibility of recession” mentioned by over half of those responding. However, a number of reasons were also mentioned by 30-40% of the respondents: devaluation of investment portfolio, increased taxes, job/compensation uncertainty, stock market volatility, and increased insurance costs.

Those under 50 years of age were more concerned about uncertain job security/compensation. Those over 50 were more concerned about a decline in their investment portfolio, stock market volatility, and increased taxes and insurance costs. Declining home values were of greater concern to those in the lowest net worth group (under $1.5M).

The absence of plans for major expenditures in the next 12 months had been relatively unchanged (43-46%) since the Fall 2005 survey. Now more than half of the respondents have no plans to make any of the 8 major expenditures in the next 12 months. This is an historic high for this survey. Plans for motor vehicle acquisitions and building a new home as a primary residence are at historic lows. Major home remodeling has equaled its historic low. Plans to take a cruise are effectively at their historic lowest level. Plans to acquire a vacation residence (by building new or purchasing an existing home) have never been lower other than in the Fall 2005 survey.
Almost two-thirds of those with annual incomes under $200,000 have no plans to make any of the major purchases in the next 12 months.

Interestingly, plans to purchase an existing home as a primary residence increased slightly from the Fall 2007 survey. Purchases of an existing home as a primary residence are most likely by those under 50 years of age and/or those with $200K+ income. If the respondents are reflecting the view that the housing market is approaching a bottom, this could be a good advance indicator for improvements in the housing market and thus the economy as a whole.

Given the 11.2 million U.S. households that comprise the wealthiest 10%, it can be calculated that this market segment represents the potential for approximately 2.2 million motor vehicle acquisitions in the next 12 months; 2.4 million home remodeling projects; 1.6 million cruise buyers (for 3.2 million total cruisers); and the acquisition of 493,000 primary residences and 470,000 vacation residences. These estimates are all down from the Fall 2007 survey.

Only one of the 17 categories of products and services, for which expected changes in spending are tracked, is in positive territory (i.e., index of 100 or more), down from five in the Fall 2007 survey. This is only the second time since this survey’s inception that there is only one positive index (the last and only other time was Spring 2003). Even the one positive index (domestic vacation travel) was down from the last survey. Of the 16 categories with negative indexes, 13 were down, two were up and one was unchanged from the Fall 2007 survey.

In 11 of the 17 categories, 25% or more of the respondents plan to spend less during the next 12 months. In only 2 of the 17 categories do 25% or more of the respondents plan to spend more in the next 12 months.

Domestic vacation travel continues as the strongest category, though it has declined in each of the last two surveys. While still the second strongest category, the index for charitable contributions is now negative for the first time since Spring 2003. The index for 8 of the 17 categories equalled or established their historic lows. Two categories increased, while one was unchanged from the last survey. Of the 14 categories recording index declines, eight had decreases of five points or more (international vacation travel, casual dining, entertainment, non-designer apparel, cameras/photographic equipment, collectibles, political contributions and charitable contributions). Cameras/photographic equipment and charitable contributions had the largest declines of 11 and 9 points, respectively.

The Future Spending Index Average of 87.3 is at its lowest level since this measure was first reported in Fall 2003.

Among the three groups that have made an effort to reduce or defer expenditures, that plan to do so, and that will do both, the spending indexes for all 17 categories were lower than the average for the total sample. Domestic vacation travel was the only category with a positive index among these respondents. Conversely, those that indicated they had neither made a conscious effort in the past nor would in the future to reduce expenditures showed the strongest future spending indexes in each of the 17 categories.

Almost 8 in 10 of affluent Americans have a mortgage on their primary residence. Those that have no mortgage tend to be the older (60 years+) and the highest net worth ($6M+) groups. Among these two groups, 40% and 47% respectively have no mortgage. Among those with a mortgage, the great majority (73%) are fixed rate instruments.

Almost 1 in 10 will experience a payment reset of their adjustable mortgage during the next 24 months. Among the 1 in 10 with an “other” type of mortgage, there was a variety of hybrid fixed, adjustable, and interest only formats.

Among the 78% of affluent Americans that have mortgages on their primary residences, most do not have large mortgage balances in relation to the value of the primary residence. Specifically, over two-thirds of the mortgages in existence represent less than half of the residence value. The highest levels of home equity are among those age 60+, those with income below $200K, and those with the highest net worth. Being “upside down” on a mortgage is rare.

Those with the lowest levels of equity in their home are the least likely to have plans to purchase 1 of the 8 major items and are most likely to be expecting the largest reductions in their spending for most, but not all, of the 17 products and services.

The full report is available for purchase a Research & Markets website.