Real Estate: Why Millionaires Are Under Counted

A new study says the United States leads the world in millionaires and that the number of ultra rich within our borders is increasing. Alas, the definition of “rich” does not include real estate holdings, a strange omission and one which means a lot of very wealthy people are not being counted.

According to the Boston Consulting Group, a global management consulting firm, millionaires are described as people with cash, deposits and listed securities worth more than $1 million, assets which are easy to convert into cash. While it’s good to be a millionaire even better are the fortunate few who are members of “ultra-high-net-worth” (UHNW) households, folks with easy-to-monetize assets worth at least $100 million.

The BCG study says the United States leads the world with 7.14 million qualifying rich households. In comparison, China — number two on the list — has 2.4 million households with assets worth at least $1 million while Japan — third on the  list — has 1.24 million households in the upper brackets.

Mere Millionaires Versus The Super Rich
More interesting perhaps are the super-rich. There are in the United States 4,754 households which have assets of at least $100 million according to BGC. Second on the list is the United Kingdom with 1,044 uber-rich households while in third place China has a respectable 983 super-rich families.

Although the numbers seem to suggest that we have a lot of people with significant holdings, the survey of the rich and the super-rich understates the real extent of wealth in the United States and no doubt worldwide. The reason is that the study excludes assets which are difficult to monetize including “any real estate (primary residence as well as real estate investments).”

You can see the problem. Real estate is worth a lot of money and if you don’t count the value of such an asset you can’t fully describe the extent of wealth in the United States or anywhere else. It’s like drawing a horse with three legs: Yes, it’s a horse but the picture doesn’t quite tell the whole story.

US Millionaires Lead The Way
According  to the Federal Reserve, American  households own real estate valued at $20.2 trillion. Subtract mortgage debt, $9.8 trillion, and there’s a hefty $10.4 trillion in residential real estate equity. Most importantly, it’s a growing asset: The Fed says the value of personal real estate grew by $751 billion in just the first quarter.

It’s easy to understand why an accounting of great wealth does not include real  estate. Real estate is often difficult to value because sale events for individual parcels are relatively rare, after all how many times do people buy and sell homes during the course of a lifetime? Moreover, the ownership of real estate is often murky when real names are hidden behind partnerships, private  businesses and corporate shells.

Still, wealth is wealth and not counting real estate under counts assets worth trillions of dollars. Think about someone who owns a Manhattan condo, a San Francisco row house or maybe Montana’s Broken O ranch. That property — with 124,000 acres — sold in 2012 for $132,500,000. It is real estate, it’s worth more than $100 million, and if we count only stocks and bonds as “wealth” we’re obviously ignoring an asset of great value. Omit millions of other parcels and properties and we’re grossly under-counting  the wealthy among us.

No less important the way we value stocks does not reflect their real market value. According to the Paris-based World Federation of Exchanges — a trade association which includes 60 publicly regulated stock, futures and options exchanges — as of January the market value of all securities worldwide was $57.2 trillion. This figure is derived by taking the number of shares for sale and multiplying by their share price. For instance, Smith Technologies may have1.5 million shares worth $10 each so it’s market cap is $15 million.

Why The Millionaire Market Cap Is Wrong
While the concept of a market cap is quick and easy to understand, the end result is wrong.

Go back to Smith Technologies. Yes it has1.5 million shares and they trade at $10 today but nobody is willing to buy all 1.5 million shares, otherwise the company would be entirely private. If the Smith stock came on the market at once share prices would plummet because of the imbalance of supply and demand. No less important, it’s not necessary to own all the shares to control the  company: You only need 750,001 shares to have absolute majority ownership and most-likely you could effectively control the company with 300,000 shares or maybe less. On a larger scale all the world’s securities are not worth $57.2 trillion because nobody wants to buy all securities, nobody has the capacity to make such a purchase, nobody needs 100 percent ownership for effective control and a bulk sale would mean lower values.

A worldwide stock market valuation is nice in theory but not realistic and the same is true with an accounting of wealth which excludes the value of real estate. The theory is good but the reality is different because not seeing real estate as wealth creates a blind spot as large as the nearest mansion, penthouse or sizable farm.


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