U.S. Household Net Worth Grows as Debt Shrinks: Fed
By: Esther Cho
Household net worth increased in the first quarter of 2012 due to gains in the stock market, while household debt declined, according to the 2012 first quarter “Flow of Funds” report released by the Federal Reserve Thursday.
Household net worth, which is the difference between the value of a household’s assets and liabilities, increased by about $2.8 trillion to $62.9 trillion compared to the previous quarter, the Fed reported.
The value of real estate assets also improved, increasing by $425 billion, or 2.3 percent, due to a 2.4 percent gain in home prices, according to analysis from IHS Global Insight.
Household debt was $12.9 trillion in the first quarter, a 0.5 percent annual decrease. Household debt has been declining since the first quarter of 2008. Home mortgage debt declined by an even greater amount at close to 3 percent in the first quarter and has also been falling since early 2008.
Government debt totaled $13.8 trillion, and federal debt rose at an annual rate of 12.5 percent while state and local government debt declined at an annual rate of 1.75 percent.
Households also borrowed less mortgage credit in the first quarter by $286.7 billion. In the previous 2011 fourth quarter, households borrowed $168 billion less in mortgage credit.
Paul Edelstein, director of financial economics at IHS said going forward, the concern is that the boost to household wealth is mostly from gains in financial assets.
“This trend, in turn, has been the result of upswings in equity markets, which have boosted household investments in equities and mutual fund shares. But in the current environment, equity market gains won’t be a stable source of wealth generation for households – certainly not as long as the Eurozone debt crisis persists, global growth slows, and the US heads for a debt ceiling debate later this year,” said Edelstein.
With stocks down 7 percent since the beginning of April, he said IHS projects household equity assets could lose about $1.5 trillion in the next quarter, unless the markets pull off a surprisingly strong rebound for the rest of June.
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