Household Net Worth Fell in 2Q per Fed Report

Despite a $355 billion increase in the value of household real estate, household net worth fell $322 billion in the second quarter, the Federal Reserve reported Thursday in its quarterly ""Flow of Funds"":http://www.federalreserve.gov/releases/z1/Current/z1.pdf report.

And, while the value of owner-occupied household real estate increased in the second quarter, total residential mortgage debt fell almost $51 billion. As a result, owners' equity increased just over $406 billion and owners' equity as percentage of the value of the real estate rose to 43.1 percent, the highest level since 2Q 2008, according to the report.

The report is the most comprehensive look at aggregate household and corporate balance sheets and income statements, a sort of blood pressure reading on the economy and its components.

The second quarter drop in mortgage debt marked the 13th straight quarterly drop. According to the report, aggregate mortgage debt at the end of the second quarter was $9.59 trillion, the lowest level in six years when homeowners owed $9.49 trillion and their equity represented 57.9 percent of the value of their homes.

The drop in household net worth, 0.5 percent, was the first since 3Q 2011 when it dropped $2.6 trillion or 4.5 percent. Net worth is the difference between assets and liabilities. A drop in net worth means debts grew faster than assets.

The decline in household net worth could have a profound effect on the economy. The economic theory of ""wealth effect"" holds that consumers tend to spend more if they ""feel"" wealthier, even if income drops and conversely.

Indeed, the total value of household assets fell $304 billion in the second quarter while household liabilities rose $17 billion. The drop in assets was due to a $475 billion decline in the value of stock holdings.

The ""wealth effect"" theory differentiates between the growth in the value of real estate and stock market assets with the change in real estate values having a larger impact on spending.

According to the report, disposable household income increased 0.9 percent or $111.4 billion in the second quarter to $11.9 trillion compared with a 1.5 percent increase or $178.1 billion in the first quarter. Quarterly income growth since the onset of the Great Recession in December 2007 has averaged 0.7 percent including four quarter-quarter declines from the third quarter of 2008 through the third quarter of 2009. (Disposable personal income rose 0.3 percent in the second quarter of 2009).

The slippage in personal income growth signals another challenge to an economy heavily dependent on personal consumption spending which is more than 70 percent of the nation's Gross Domestic Product.