March 7 (Bloomberg) -- Household wealth in the U.S. climbed in the fourth quarter to the highest level in five years, propelled by a gain in home prices that is helping repair family finances.
Net worth for households and non-profit groups increased by $1.17 trillion from October through December, or 1.8 percent from the previous three months, to $66.1 trillion, the Federal Reserve said today from Washington in its flow of funds report. It was the highest since the fourth quarter of 2007.
Household wealth is approaching its pre-recession level as the recovery in home values helps Americans overcome higher taxes Congress put in place this year. Federal Reserve policy makers’ plans to keep lending rates low may continue to shore up finances, giving consumers the confidence to keep buying big-ticket items including cars and homes.
“Growing wealth puts households in a better position,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts. “They’ve acquired a lot of financial assets, and that’s a positive for spending.”
Household net worth is still $1.34 trillion below its pre-recession peak of $67.4 trillion reached in the third quarter of 2007.
The value of financial assets owned by American households, including stocks and pension-fund holdings, increased by $784.4 billion in the fourth quarter, today’s Fed report showed.
The gain this quarter may be even bigger as investors have taken tax increases and federal government budget cuts in stride. On March 6, the Dow Jones Industrial Average closed at a record, and the value of U.S. equities has now increased by $1.44 trillion since the end of 2012.
The Dow rose 0.3 percent today to 14,341.5 at 12:49 p.m. in New York as data showed the job market was improving.
The number of claims for jobless benefits unexpectedly fell by 7,000 to 340,000 in the week ended March 2, the lowest since mid January, according to figures from the Labor Department. The median forecast of 50 economists surveyed by Bloomberg called for an increase to 355,000. The four-week average dropped to a five-year low.
Household real-estate net worth climbed by $478.6 billion in the fourth quarter, a sixth consecutive gain and the biggest since the first three months of 2006, according to today’s flow of funds data. Owners’ equity as a share of total household real-estate holdings increased to 46.6 percent last quarter from 45.2 percent in the previous three months.
Underpinning those gains, the housing market is making its way toward recovery. CoreLogic Inc. said last month that the national median single-family home price climbed 10 percent in the fourth quarter from a year earlier, the biggest gain since 2005. Single-family home prices rose in almost 88 percent of U.S. cities in that period as the recovery broadened.
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 impact on consumer spending than the ups and downs of stock prices and financial wealth. Case told Bloomberg News last month that consumer spending would be boosted by $80 billion in 2013 by the rise in home values that has already occurred and homeowners’ expectations that additional gains will come.
Automakers are among those benefiting from improving household balance sheets, which is helping support sales beyond car-owners’ need to replace older models. Cars and light trucks sold at a 15.3 million annualized rate in February, capping the best four months since 2008.
“In addition to the pent-up-demand story that we have in terms of replacement, the housing-sector recovery is important too,” Jenny Lin, senior U.S. economist at Ford Motor Co., said during a Feb. 1 sales teleconference. “That makes the household balance sheet a lot better and that would improve the wealth effect here.”
Central bank officials are looking to spur the expansion by holding interest rates low, thereby stimulating equity and real-estate markets and bolstering household wealth. The Federal Open Market Committee in January affirmed plans to keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.
“Even if the interest rate channel is less powerful right now than it was before the crisis, asset purchases still work to support economic growth through other channels, including by boosting stock prices and house values,” Fed Vice Chairman Janet Yellen said earlier this week. “The resulting improvement in household wealth supports greater consumption spending.”
As household wealth improves, Americans are gaining confidence to borrow. Today’s flow of funds report showed household debt increased at a 2.4 percent annual rate from October to December, the biggest advance in almost five years. Mortgage borrowing fell at a 0.8 percent pace, the smallest decrease since the first three months of 2009, the last time it rose. Other forms of consumer credit, including auto and student loans, climbed at a 6.6 percent pace, the most in five years.
Total non-financial debt increased at a 6.4 percent annual pace last quarter, led by an 11.2 percent advance by the federal government and an 8.7 percent gain among businesses. State and local government borrowing dropped at a 3.7 percent pace.
Gains in pay are helping consumers meet their loan payments even as debt climbs. Mortgage and consumer-loan payments in the third quarter amounted to the smallest share of after-tax income since 1983, according to Fed figures issued in December. The debt-service ratio was 10.6 percent of disposable income from July to September. Five years earlier, the figure peaked at 14.1 percent.
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