According to data from the Federal Reserve, American households continue to see their net worths improve. Net financial net worth including real estate, stocks, and other assets rose to $64.77 trillion. This leaves Americans with just $1.2 trillion less in net worth than when household net worth peaked in 2007.
Three factors are driving American net worth gains. First, Americans continue to benefit from rising home prices. Real estate prices rose by roughly $300 billion, adding significantly to American balance sheets. Secondly, stock prices rose and more companies are paying dividends, adding another $520 billion to the total American net worth.
Finally, Americans are paying down debt. In the third quarter of 2012, American households were cutting debt at an annualized pace of 2 percent per year. Household debt fell by $65 billion to $12.8 trillion. In earlier quarters, household debt had increased slightly.
Economists look at household net worth as an economic indicator. Traditionally, Americans spend more when their net worth increases. A rising net worth leads to what economists call the “wealth effect,” which is marked by increasing spending as more people realize growing wealth.
The level of debt carried by American households is still quite high by historical standards, equal to 112.7% of Americans' household after-tax income. However, that is the lowest reading since 2003 and down .7% from the second quarter data release from the Fed. Economists continue to focus on true debt servicing costs, or the monthly cost of debt as it relates to a consumer's income. Debt servicing costs as a percentage of income fell to the lowest level since 1993 due to falling balances and rapidly declining interest rates.
If the trajectory continues, the American consumer should soon be ready to spend again given that only a small slice of incomes are dedicated to debt service.