Magazine

Why More Households Are Feeling Flush


If you want to understand why consumers have been so resilient given everything thrown at them this year, take a look at the Federal Reserve's recently released data on household balance sheets for the third quarter. The numbers show that households are the wealthiest they have ever been, and it's not just because of soaring home prices.

Household net worth, the sum of all assets minus liabilities, increased by $1.3 trillion last quarter from the second quarter. Total liabilities jumped by $331 billion, one of the largest quarterly rises on record, but household assets soared by $1.6 trillion, five times as much.

Only about one-fourth of the rise in net worth last quarter reflected higher home equity, a shade less than the contribution over the past year. Households' cash assets in many highly liquid deposits posted a healthy increase as did the values of stocks and mutual funds.

The rise in household wealth allays concerns over the consumer outlook, including the fretting over holiday buying. With assets growing, consumer spending is unlikely to buckle under higher fuel bills, just as it didn't falter when gasoline was $3 per gallon.

Much attention has been paid to this year's negative savings rate, meaning that consumers are spending more than their incomes. But households are saving from sources other than income, and they are spending some of their wealth. The government's conventional savings metric doesn't account for these unconventional behaviors.

Moreover, homeowners are not just frittering away their home equity. For the past two years, Fed data show that home equity as a share of household real estate is up, not down, from 55.8% to 57.1% last quarter.

Record wealth also helps to explain why large increases in debt relative to income remain manageable, even as the Fed has lifted short-term interest rates. Delinquency rates on both mortgages and other types of loans to households remain at very low levels.

In 2006, balance sheets should stay strong. Borrowing will slow as interest rates rise, cooling the growth in liabilities. And even if home prices stop rising, assets should benefit from stock market and other gains.

By James C. Cooper


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