June 5 (Bloomberg) -- U.S. household wealth fell in the first quarter by the most in more than five years and borrowing slowed as home values and stock prices plunged and lenders restricted credit, Federal Reserve figures showed.

Net worth for households decreased by $1.7 trillion from the previous three months, the second straight decline and the biggest since the third quarter of 2002, according to the Fed's quarterly Flow of Funds report today. Real estate-related assets dropped by $328.9 billion, the most since records began in 1952.

A separate report today showed the number of homes in foreclosure last quarter rose to the highest level in almost three decades, indicating lower home prices and reduced access to loans are hurting homeowners. A slowdown in consumer spending, which accounts for two-thirds of the economy, threatens to push the U.S. into a recession.

``Households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices,'' Fed Chairman Ben S. Bernanke said in a speech this week. ``Until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside.''

Owners' equity as a share of their total real-estate holdings fell to 46.2 percent, the lowest since quarterly records began in 1951, from 48.9 percent in the prior period.

Price Measures

The Fed's calculations are based on a gauge of home prices published by the Office of Federal Housing Enterprise Oversight. Had the central bank used a measure developed by S&P/Case- Shiller instead, the loss of net worth would probably be larger.

The Ofheo price index based only on purchases dropped 1.3 percent in the first quarter and was down 3.2 percent in the 12 months ended in March. A similar gauge by S&P/Case-Shiller, which unlike Ofheo also includes non-conforming loans, dropped 14 percent in the first quarter compared with the same period last year.

The drop in housing-related household net worth from October through December followed a decline of about $530 billion in the previous three months. Mortgage borrowing by households rose at a 3 percent annual pace, the smallest gain since 1970.

Total borrowing by consumers, businesses and government agencies rose at an annual rate of 6.5 percent last quarter compared with a 7.5 percent gain the prior quarter. Every category slowed except borrowing by the federal government.

Total borrowing by households increased at a 3.5 percent pace, and business borrowing rose at an annual pace of 9.2 percent. Borrowing by state and local governments climbed at a 6.4 percent rate after rising 7.7 percent the prior quarter, the Fed said.

Federal government borrowing rose at an annual pace of 9.5 percent after increasing at a 5.1 percent rate.

To contact the reporter on this story: Carlos Torres in Washington Storres2@bloomberg.net

Last Updated: June 5, 2008 12:03 EDT