What these data tell us
What a year makes for American household net worth. In 2008, the Federal Reserve reported that it declined by $5.3 trillion in 4Q08 and down by $11.2 trillion for the entire year. CNN Money writes, “It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. The drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the government began keeping quarterly records. The 9% drop was also the largest drop as a percentage change on record. The downward spiral in net worth was lead by a plunging stock market and collapsing home values.”
The country indeed has its fair share of plunging household net worth. In a paper entitled “The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances” by Kevin Moore and Michael Palumbo of The Federal Reserve Board, they write, “The substantial decline in household net worth in the current recession primarily reflects appreciable decreases in both equity prices-down around 25 percent, on net, even after the past few months’ market rally-and the drop in house prices across the country-about 10 percent since December 2007 and 20 percent since the peak in prices in December 2006… The financial strain on household balance sheets in the current recession can be strongly linked to the fact that corporate equity and housing were revalued sharply at (more or less) the same time… In the 2001 recession (and recovery), balance sheets for many households were hit by the sharp equity revaluations, but home price appreciation across most of the country provided a substantial offset.”
But talk about a rebound in values in the news this year! I’m sensing a bit of gradual pick up on household net worth last year. The Associated Press reports, “Household net worth rose 1.3% last quarter, mainly because the recovering economy boosted stock portfolios. But the gain was much less than in the previous two quarters. The Fed said yesterday that national net worth rose to $54.2 trillion. Even with the gain, Americans’ net worth would have to rise an additional 21% just to get back to its prerecession peak of $66 trillion.”
There’s something to be glad about this news as homeowners generally have more room for savings. Consumers are cutting their debt at a now faster rate. As total U.S. household debt fell 1.7 percent to $13.5 trillion, this reflects easing conditions in the market which reminds consumers to stay away from incurring much debt on things that they don’t necessarily need. The Fed report also adds that home mortgage debt shrunk at an annual rate of 1.6 percent that came down from a 2.3 percent plunge in home mortgage debt in 3Q09.
We must keep optimistic.