Surging Real Estate Values Trump Increasing Debt, Low Saving Rate and Flat Stock Values, Driving Household Net Worth Higher

The net worth of U.S. households rose to $49.8 trillion in the second quarter of 2005 according to the Federal Reserve’s recently released Flow of Funds report. A surge in real estate values trumped an increase in debt, low saving rate and flat stock values, with household net worth eclipsing yet another all-time high and inching closer to the $50 trillion milestone.

Real estate is increasingly the dominant asset on household balance sheets, rising to an all-time high of 40.2% in the second quarter. The larger share was again driven by strong gains in real estate values. The latest increase takes the running total to a new all-time high of $20 trillion.

Household debt rose $260 billon to a record $10.8 trillion in the second quarter. The debt is not as onerous as it seems, however, given that assets continue to rise even faster than debt. While households have added roughly $500 billion in debt since the beginning of the year, their assets have grown by almost $2 trillion.

Both borrowing under home equity lines and other mortgage debt rose in the second quarter. A modest slowing in consumer credit growth was trumped by the much larger role of mortgage debt, which drove the pickup in credit usage in the second quarter.

Looking ahead, rising interest rates will reduce the attractiveness of additional borrowing. At the same time, higher rates will reduce the pace of asset price appreciation, particularly house price appreciation. This will contribute to a slowing in borrowing and induce consumers to increase their saving, as they will no longer be able to count on capital gains to increase their wealth sufficiently. However, the impact will be slow, with prices continuing to appreciate in the second half of the year even in the most at-risk markets. Household net worth will likely top the $50 trillion milestone in the third quarter.

Source: Consumer Flow (http://www.consumerflow.com), Economy.com

Economy.com’s Consumer Flow (http://www.consumerflow.com) provides analysis of key trends in consumer balance sheets, income, and spending.