Households’ net worth rises for first time in two years

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American households were $2 trillion richer on June 30 than they were three months earlier, the first time in two years that household net worth has increased, the Federal Reserve reported Thursday in its quarterly flow of funds report.

Household wealth rose in the second quarter at a 17 percent annual rate, or $2 trillion, to $53.1 trillion after falling at a 13 percent rate in the first quarter, the Fed said. It was the first time since the second quarter of 2007 that wealth had increased. Net worth is down $12.2 trillion from the peak in 2007, an indication of how much the collapse in stock prices and home prices have hurt.

The figures are not adjusted for inflation.

Net worth is defined as assets minus liabilities. Assets rose by $2 trillion to $67.2 trillion. Liabilities fell by $34 billion to $14.1 trillion.

The rally on Wall Street was the main reason for the increase in household wealth, but rising home prices contributed as well. Wealth in corporate equities rose by $1.04 trillion, while real estate wealth rose by $139 billion. Assets held in mutual funds, life insurance and pension funds rose by $1.06 trillion.

Households had lost real-estate wealth for nine consecutive quarters before the second quarter’s gain.

Consumers continued to pay down debts or have their debts written off at a record pace. In the second quarter, household debt fell at a 1.7 percent annual rate to $13.7 trillion, matching the record percentage decline in the fourth quarter. Household debt has fallen four quarters in a row and is down 5 percent from the peak. Before this recession, household debt had never declined in any quarter dating back to 1952.

Stimulus payments boosted disposable incomes by 5.2 percent annualized to $10.9 trillion annually. It was the first increase since the stimulus payments in the second quarter of 2008. Over the past four quarters, disposable incomes fell 0.6 percent, the first year-over-year decline on record dating back to 1952.

Household debt dropped to 126 percent of disposable income from 128 percent in the first quarter and a record 131 percent in the first quarter of 2008. In 2000, it was 91 percent.

Household mortgage debt fell 1.4 percent annualized to $10.4 trillion, the fifth consecutive decline in mortgage debt. Consumer credit fell at a 6.1 percent annual rate to $2.5 trillion. It was the largest percentage decline in consumer debt since 1980. In a separate report, the Fed has said consumer credit declined even faster in July, dropping at a 10.4 percent annual rate.

Total debt in the economy grew at a 4.9 percent annual rate, boosted by massive debts taken on by the federal, state and local governments.

Federal government debt rose at a 28.2 percent annual rate, the fourth straight increase of more than 20 percent. In the past year, federal debt rose by $1.9 trillion to $7.2 trillion. State and local borrowing rose at an 8.3 percent annual rate in the quarter to $2.3 trillion.

Nonfinancial business debt fell at a 1.8 percent annual rate, despite a 1 percent increase in corporate debt. The net worth of nonfarm nonfinancial companies fell at a 17 percent annual rate, the seventh consecutive decline.

Debt of domestic financial firms fell at a 12.2 percent annual rate to $16.5 trillion, the largest percentage decline since 1961.

(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.