The Dark Side of Americans' Rising Net Worth

American households were worth $70.3 trillion last quarter, a $3 trillion bump.

The growth in net worth is in part a function of boosts in the stock market and home values.

The growth in net worth is in part a function of boosts in the stock market and home values.

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Americans' net worth has shaken off the effects of the recession and hit a record high, according to data released by the Federal Reserve this week. Taken together, American households were worth $70.3 trillion in the first quarter, up $3 trillion from the fourth quarter of 2012 and well up from a recession-era low of $54 trillion. Household net worth is now even further past pre-recession levels; in 2007, household net worth was at $66.9 trillion.

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The growth in net worth is in part a function of boosts in the stock market and home values. Nearly all of the $1 trillion in financial assets that households picked up in the first quarter were in the stock market, and that market has been going strong. The Dow Jones Industrial Average picked up nearly 1,500 points in the first quarter, a gain of over 11 percent. In addition, residential real estate values climbed by over $780 billion in the first quarter.

However, net worth is a measure of households' assets minus liabilities, and as IHS Global Insight Director of Financial Economics Paul Edelstein notes in a commentary, the report "also reflects falling household debt as consumers spend only cautiously." This makes declines in debt a mixed signal: it means healthier household balance sheets, but also reflects less consumer activity.

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Household debt fell by 0.6 percent in the first quarter after posting only slight growth, of 0.2 percent, in 2012. This may signal that homes are not yet through with the steady deleveraging process that they began during the recession. Household debt fell for four straight years, from 2008 through 2011.

Credit card and mortgage debt have both seen strong declines since hitting peaks in 2008, according to data from the New York Fed. That could be read as homes digging out from the burst of the housing bubble and spending responsibly, but it also may reflect people either unable or unwilling to invest in homes and other purchases. For these reasons, it might not be a bad thing if household net worth should fall in the near future.

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"If net worth began to fall because of rising household debt, within reason this could be a positive sign for the economy," says Edelstein.

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