Household Sector Continues to Deleverage

Unease about the economy and the job market has caused households to pay down their existing debts and to be reluctant to take on new debt obligations.

The Federal Reserve’s Flow of Funds reported that amount of outstanding debt held by the household sector has declined since the middle of 2008. Mortgage debt fell for the seventh consecutive quarter to $10.26 trillion, as of the fourth quarter of 2009. Mortgage debt peaked at $10.55 trillion in the first quarter of 2008. Consumer credit has fallen for four consecutive quarters from $2.59 trillion at the end of the fourth quarter 2008 to $2.48 trillion at the end of 2009.

Additionally, banks are reporting weak demand for consumer loans, according to the Federal Reserve’s Senior Loan Officer Opinion Survey.

As a result of this decline in consumer and mortgage debt, the household debt (mortgage plus consumer loans) to disposable personal income ratio has fallen to 115.3 percent – its lowest level since the second quarter of 2005.

Household Net Worth Grew During 4th Quarter

The Federal Reserve is reporting that household net worth in the fourth quarter of 2009 increased by $682.7 billion during the fourth quarter to almost $54.18 trillion. This was the third consecutive quarterly increase in household net worth.

During the fourth quarter, assets of the household sector increased by approximately $657 billion, while liabilities fell by $25.6 billion.

The Federal Reserve reported that tangible assets of the household sector fell during the last quarter of 2009 due to continued decline in the value of real estate assets. However, the Federal Reserve Flow of Funds data shows that owner’s equity as a percentage of household real estate increased to 38.1 percent, after bottoming out at 33.5 percent during the first quarter of 2009.

Financial assets of the household sector grew by $676.8 billion during the 4th quarter to $45.11 trillion. Household assets in deposits, corporate equities, mutual fund shares, and pension fund reserves expanded during the quarter.