Saturday, April 08, 2006

Rising Debt Offsets Home-Equity Gains

Americans may feel richer because of soaring home prices, but they're not.

U.S. families' wealth stagnated during the economy's recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values, the Federal Reserve reported Thursday in its latest Survey of Consumer Finances.

Home prices jumped nearly 27 percent during the survey period, and the share of households owning homes rose to 69.1 percent in 2004, the report said. That made Americans feel good. And it did help boost the total value of families' assets — such as homes, autos, stocks, bonds and other investments.

But wealth, or net worth, measures the value of a household's assets minus its debts — such as mortgages, car loans, student loans and credit-card balances. And debt climbed steadily during the survey period, as the Fed slashed interest rates to stimulate borrowing and spending in rocky economic times.

After totaling up both sides of the ledger, the median net worth of American households rose just 1.5 percent over the three years measured, to $93,100, according to the Fed's report, which is compiled every three years to provide a portrait of family finances.

By comparison, median family wealth rose 10.3 percent in the previous survey period, from 1998 through 2001, and shot up 17.4 percent from 1995 to 1998, during an economic boom that pushed up stock prices and wages.

The only weaker gain in wealth recorded by the Fed was in its first such survey, in 1989-92, when median household net worth dropped 5.2 percent during a period that included the recession of 1990-91.

Median family incomes rose just 1.6 percent from 2001 through 2004, to $43,200, the report said. That marked the weakest results since a 6.9 percent drop in the 1989-92 period.

Income growth was held back in 2001-04 largely because of a 6.2 percent fall in median wages, the largest source of family income, the report said. Investment income also declined, as interest rates, stock prices and dividends fell through much of the survey period.

The survey's findings reflect how households coped financially with the economic turmoil of that period, which coincided with President Bush's first term, a recession, terrorist attacks, accounting scandals, and wars in Iraq and Afghanistan. Businesses slashed millions of jobs and cut back sharply on investment in plants, software and equipment from 2001 through early 2003 while Bush and Congress cut taxes and the Fed lowered interest rates to keep the economy going.

Consumers responded enthusiastically, borrowing cheaply to pay for houses, cars and other goods and services. They succeeded in pumping up economic growth to a strong 4.1 percent in 2003 and 3.8 percent in 2004.

One welcomed result was the hot housing market. The median value of a principal residence rose to $160,000 in 2004, up 22 percent from 2001.

But consumers revived the economy at a cost: by accepting a bigger debt burden and by devoting more of their income to pay interest on the debt.

The overall median value of household debt rose 33.9 percent from 2001 through 2004 to $55,300, the Fed reported. Families spent 14.4 percent of their incomes on debt service in 2004, up from 12.9 percent in 2001.


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