WASHINGTON – The net worth of American households fell by the largest amount in more than a half-century of record keeping during the fourth quarter of last year, reflecting the blow families are taking from a plunging stock market and dwindling home prices.
The Federal Reserve said Thursday that household net worth dropped by a record 9 percent in 2008's October-December period compared to the third quarter. That was the biggest decline on records that go back to 1951.
The drop represented a loss of $5.1 trillion in family net worth, leaving the total at $51.48 trillion at the end of the year. Net worth represents total assets such as homes and checking accounts minus liabilities like mortgages and credit card debt.
The big blow to the family balance sheet in the fourth quarter came from the plunging stock market, which the Fed estimated slashed Americans' stock holdings by 23.2 percent.
While the Fed employs a slightly different methodology, that estimate was nearly identical to the 23.5 percent stock loss in the Wilshire 5000, which tracks the value of publicly traded common stocks. Since peaking in October 2007, the Wilshire 5000 has shed 53 percent of its value.
Another big blow to net worth in the fourth quarter came from the continued fall in housing prices, the biggest asset held by most American families. Household real estate holdings declined by 3.8 percent in the fourth quarter, compared to the July-September period, according to the Fed's calculations.
That estimate was identical to the 3.8 percent decline in home prices for the fourth quarter in the Case-Shiller national home price index, a closely watched private sector gauge of home prices.
Since peaking in the first three months of 2006, home prices have fallen by 25 percent with many economists expecting they will keep falling by probably another 20 percent before the deep slump in housing stabilizes.
The decline in net worth in the fourth quarter represented the sixth-straight quarterly drop in net worth and underscored the battering that U.S. families are undergoing in the midst of a steep recession that has led to surging unemployment and plunging home and investment values.
The plunge in net worth has sent families scrambling to tighten their belts by cutting back on spending. The government also reported Thursday that retail sales posted a smaller-than-expected 0.1 percent decline in February and the January performance was revised sharply higher.
However, economists said it is too early to proclaim that the deep slide in consumer spending, which accounts for two-thirds of economic activity, is coming to an end.
They predict further cutbacks in spending in the months ahead as families continue to face the prospect of rising layoffs and the need to repair their tattered household balance sheets.
"Families' cracked nest eggs are going to be a long-term drag on spending," said Mark Zandi, chief economist at Moody's Economy.com. "Even when consumers go back to the stores, they will be spending less, particularly high-income families who are finding they have not saved enough for retirement given the big declines in their net worth."
Family net worth hit an all-time high of $64.36 trillion in the April-June quarter of 2007 but has fallen in every quarter since that time.
The record 9 percent drop in the fourth quarter pushed total net worth down to $51.48 trillion, a level that is 20 percent below the third quarter 2007 peak.
After five straight years of sharp increases in home prices, the housing bubble burst with prices peaking in early 2006. Since that time they have fallen sharply, a decline that sent shockwaves through the financial system as banks were hit with billions of dollars of losses on mortgages and mortgage-backed securities. As those losses mounted in late 2008, the financial crisis escalated, sending the stock market into a tailspin.
The federal government created a $700 billion rescue fund for the financial system last October but so far that effort has shown only modest results in terms of getting banks to resume more normal lending patterns.
Households have also been battered by the recession that began in December 2007 and is already the longest in a quarter-century. That downturn has sent unemployment soaring to a 25-year high of 8.1 percent in February with 4.4 million jobs lost since the downturn began.
I dunno. If it's a 50-year-low adjusted for inflation then it might be real. If they're just talking about raw dollars, I agree - it almost has to be B.S. by default based on inflation effect and population growth alone.