U.S. Household Wealth Logs Biggest Quarterly Drop Since Lehman’s Collapse

Americans’ household wealth suffered its biggest quarterly loss in more than two years this summer while corporations raised their cash stockpiles to record levels.

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Stocks, pension funds, and home values lost value in the July-September quarter, pushing down household net worth 4 percent to $57.4 trillion, according to a Federal Reserve report released Thursday, accounting for the biggest quarterly drop since the tumultuous period after Lehman Brothers filed bankruptcy in September 2008.

Household wealth, or net worth, is the value of assets like homes, bank accounts and stocks, subtracting debts like mortgages and credit cards.

Lower net worth can hurt the economy, as people tend to spend less, growth slows, and businesses cut back on hiring and expansion. The stock market’s decline in particular has both restrained spending and indicated other factors — specifically worries about Europe’s debt crisis and the U.S. economy — that have restrained spending.

The Standard & Poor’s 500 index declined 14 percent in the July-September period after four quarterly increases, driven lower by economic concerns. Stocks have rebounded about 9 percent in the current quarter, but the S&P is still down about 21 percent below its peak four years ago.

The value of Americans’ stock portfolios fell last quarter, declining 5.2 percent in three months. T. Rowe Price Associates estimates that two-thirds of that decline has been recouped in the current quarter.

But home equity, the biggest source of wealth for most Americans, continues to decline as home prices remain under pressure, slipping 0.6 percent last quarter. Total values fell to $16.1 trillion, down from nearly $21 trillion in 2007.

At the same time Americans were finding themselves strapped for cash as their personal worth declined, corporations were amassing record cash stockpiles — $2.1 trillion at the end of September. Their reluctance to spend that money explains why growth in the job market has been slow. During the last quarter, the national unemployment rate hovered above 9 percent, finally falling to 8.6 percent in November.

Roughly half of all American households own stocks or stock mutual funds. Stock portfolios comprise about 15 percent of Americans’ wealth — less than housing but head of bank deposits. However, 80 percent of stocks belong to the richest 10 percent of Americans, and the richest 20 percent represent about 40 percent of consumer spending.

Many economists expect home prices to continue to decline as banks resume foreclosures on past-due mortgages that were delayed by a government investigation into lending practices. Combine that with stagnant pay, and Americans are less likely to spend, creating a huge drag on the economy, as consumer spending accounts for roughly 70 percent of the U.S. economy.

In the end, spending is unlikely to be affected by the 1.25 percent decline in household debt, especially when taking into consideration that the main reason for declining debt was the overall decline in mortgage debt as more Americans are defaulting on payments and losing their homes to foreclosure, rather than decreasing their debt by paying off the loans.

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According to the Fed, the average household owes about $121,000 on mortgages, credit cards, auto loans, and other debt — that’s 119 percent of the money Americans have left after taxes.