Household assets said to wipe out slump loss

— Household wealth in the U.S. climbed in the fourth quarter to the highest level in five years, propelled by surging stocks and a gain in home prices that is helping repair family finances gutted by the recession, the Federal Reserve said Thursday.

The gains are helping support the economy and could lead to further spending and growth.

“Growing wealth puts households in a better position,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Mass. “They’ve acquired a lot of financial assets, and that’s a positive for spending.”

Household wealth amounted to $66.1 trillion at the end of 2012, which was $1.2 trillion more than three months earlier and 98 percent of the pre-recession peak.

Further increases in stock and home prices this year mean that Americans’ net worth has since topped the pre-recession peak of $67.4 trillion, private economists say. Wealth had bottomed at $51.4 trillion in early 2009.

“It’s all but certain that we surpassed that peak in the first quarter,” said Aaron Smith, senior economist at Moody’s Analytics.

Household wealth, or net worth, reflects the value of assets such as homes, stocks and bank accounts minus debts such as mortgages and credit cards. National home prices have extended their gains this year. And the Standard & Poor’s 500 index, a broad gauge of the stock market, has surged 8 percent since Jan. 1.

Improving residential real-estate values may support the economy even more than gains in equities. Economists Karl Case, John Quigley and Robert Shiller found that changes in house prices - and in real-estate wealth - have a bigger effect on consumer spending than the ups and downs of stock prices and financial wealth. Case told Bloomberg News last month that consumer spending would grow by $80 billion in 2013, pushed by the rise in home values that has already occurred and homeowners’ expectations that additional gains will come.

But other economists caution that the recovered wealth might spur less consumer spending than it did before the recession. Dana Saporta, an economist at the financial services company Credit Suisse, notes that the value of home equity Americans are cashing out has fallen 90 percent in six years.

And since the housing bust, when home values fell broadly for the first time in decades, many homeowners are doubtful that higher prices will last, Saporta said. They won’t necessarily spend more as a result.

The rebound in wealth has benefited mostly wealthier Americans. The Dow Jones industrial average set a record high Tuesday, and roughly 80 percent of stocks are held by the wealthiest 10 percent of households.

For most middle-class Americans, home equity is their largest source of wealth. National home values remain about 30 percent below their peak.

Homes accounted for two thirds of middle-class assets before the recession, said economist Edward Wolff of New York University. Among all U.S. households, they accounted for only one-third of assets.

Some economists expect the regained wealth to contribute further to the economic recovery.

“It should boost consumption because as people feel wealthier, they tend to spend more,” Saporta said. “It doesn’t necessarily mean that households will go on a spending spree.”

The Fed report also showed that Americans are increasingly taking on more debt, enabling them to spend more. In the October-December quarter, household debt rose 2.4 percent. It was the sharpest gain in nearly five years.

And it marked a shift from when the recession ended in June 2009, after which many households focused on repaying debt rather than borrowing. Economists increasingly think that process, known as “deleveraging,” is ending.

“The drag from deleveraging is now a thing of the past,” Smith said. “Household credit is once again supporting growth.”

Smith noted that the two key trends in the Fed report - higher wealth and more consumer borrowing - are likely enabling people to spend more at a critical time: Social Security taxes increased this year for most workers as a short-term tax cut expired. Someone earning $50,000 has about $1,000 less to spend in 2013. A household with two high-paid workers has up to $4,500 less.

And gasoline prices have risen sharply. The average price for a gallon is $3.72, roughly 44 cents more than when the year began. In Arkansas, the average price Thursday was $3.56, down from $3.62 a week ago, according to auto club AAA.

“The combination of what we’re seeing in terms of wealth increases and higher household borrowing explains why spending has not fallen more in the face of higher taxes and gasoline prices,” Smith said.

Information for this article was contributed by Christopher S. Rugaber and Bernard Condon of The Associated Press and by Alex Kowalski of Bloomberg News.

Front Section, Pages 1 on 03/08/2013

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