Household Wealth Advances by 3.9%

For the first time in nearly two years, American households grew a little wealthier in the second quarter, but they have a long way to go to recover what they've lost in the downturn.

Advances in stocks and home prices drove the gains, the Federal Reserve said in a report Thursday. In response to the recession, families also saved more and borrowed less, shedding some of the debt owed on their homes and credit cards.

The central bank's quarterly flow of funds report, a broad snapshot of the assets and liabilities of U.S. households and businesses, showed that household net worth grew 3.9% to $53.1 trillion in the April-June period from the first quarter. But it was still down almost 19% from the $65.3 trillion peak in the third quarter of 2007, just before the stock market reached its high.

Households cut their debt at a 1.7% annualized pace in the second quarter, led by declines in mortgage debt and consumer credit. It was the fourth straight quarterly drop. Total household debt fell to $13.7 trillion from $13.8 trillion.

Though business and household borrowing declined, government borrowing surged at a 28% rate as the U.S. implemented aid packages for the economy, Wall Street and auto makers. While slightly higher than government borrowing during the first quarter, that was well below the nearly 40% pace of the gains in the second half of 2008.

Improvement in the stock market was the biggest contributor to the recovery for households. Major stock indexes have risen more than 50% from their March lows, with much of that gain coming in the period covered by the report. The Fed said households' stock portfolios rose 21.7% and mutual-fund shares increased 14.9% during the quarter from the end of March.

Home prices also started rising for the first time since 2006. The Fed said the value of real estate holdings rose 1.8% during the second quarter. Prices are now edging higher in most regions of the U.S., a trend that -- along with continuing gains in stocks -- points to higher household wealth in the third quarter as well.

The recovery helped push homeowner's equity -- as a share of household real-estate values -- up to 43.1% from 41.9% in the first quarter, a measure that peaked at 58.7% in 2005. The Fed said home-mortgage debt fell an annualized 1.5% during the quarter.

Americans cut their borrowing and spending to help pay down debt. Consumer credit fell at a 6.5% annualized pace after declining 3.7% in the first quarter, the Fed said.

In addition to federal borrowing, state and local governments increased their debt at an annual rate of 8.3% -- well above the 4.9% pace in the first quarter -- as they struggled to compensate for revenue declines.

Nonfinancial business debt contracted at a 1.8% annual pace, the second straight quarterly decline and the largest drop since 1993. The Fed said the decline was concentrated in commercial paper, loans and commercial mortgage borrowing. For More Details ECONOMY