The Wall Street Journal

10 June  2011

U.S households saw their net worth edge up as the year began, with rising stock prices, increased savings and debt reductions outpacing a continued slide in real-estate prices.

The Federal Reserve said Thursday that average household wealth—stocks, bonds, homes and other assets, minus mortgages and other debts—rose 1.2% to $58.1 trillion in the first quarter.

The increase should bolster the U.S. economy, because as individuals’ net worth rises, they tend to become more confident about their financial future and willing to spend. Notwithstanding the recent decline in stock prices, “in general, financial wealth has been increasing, which would tend to increase consumer spending,” said Goldman Sachs economist Andrew Tilton.

To be sure, even though net worth rose to its highest level since mid-2008, it remained well below the peak of $65.8 trillion hit in June 2007. And the upturn has been driven largely by stock prices—which benefit those with much of their wealth in equities. The much larger group of Americans who hold most of their wealth in their homes is still feeling the pain of the continuing real-estate slump.

Paul Ashworth, who owns Ashworth Drugs, a pharmacy in Cary, N.C., says his retirement portfolio has recovered somewhat in the past couple of years, but is more than 20% below its level when the recession hit. This year, his family has cut back on dining out and scrapped its subscriptions to the ballet and symphony. “The bounce hasn’t really made me feel better at all,” said the 52-year-old Mr. Ashworth. “I still have a job, but I don’t feel as secure. We don’t feel as good about getting out and spending as we used to.”

The value of U.S. households’ financial assets, including stocks, money-market holdings and savings deposits, rose 2.4% to $48.9 trillion. The value of their real-estate assets moved in the opposite direction, falling 1.9% to $18.1 trillion.

The continuing decline in housing is a significant damper on consumer spending. During the housing boom of the past decade, many consumers extracted wealth from their houses through mortgage refinancing—which spurred spending. But now, with many homeowners owing more on their mortgages than their properties are worth, that dynamic no longer works.

In the past two years, Mr. Hershfield, 29, and his family have spent less on restaurants and vacations. He and his wife have put aside the resulting savings for an emergency, in case business suffers at the print shop or at a restaurant Mr. Hershfield owns.

“It can feel like I’m a few clients away from having to close my doors, potentially. That’s a scary thought,” he says. “[The cuts] are permanent until I feel I don’t have to worry about the uncertainty anymore.”

Households pared debt for the tenth consecutive quarter, partly as a result of paying down debt but mostly due to defaulting on mortgages and other loans.

Total household debt outstanding fell 0.9% to $13.3 trillion. At 114% of annual after-tax income, household debt is down sharply from its third-quarter 2007 peak of 130%. But in the 1990s, the debt-to-income ratio averaged 85%, and many economists think households should keep lowering debt levels to put their balance sheets in order.