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Household balance sheet update




The Federal Reserve today released its Flow of Funds report for Q3/11, and this chart extracts the relevant data for the status of households' balance sheet. Net worth fell about $2.5 trillion in the third quarter, mainly due to the 14% decline in the stock market during that period (the third quarter ended one day before stocks hit their Oct. 4th low for the year). Real estate values increased marginally, and debt declined marginally during the quarter.

I think it's important to note that households have rebuilt their net worth to almost what it was in 2005, just prior to the great housing market collapse. Given the rebound in equities to date, household net worth today is likely very close to its 2005 levels. In other words, despite the massive destruction of home equity values and the meager 2% average annual return on the S&P 500 since the end of 2005, households have managed to regain their financial footing mainly by boosting savings. We would all like to be richer, and millions would still love to again find they have positive equity in their homes, but we are making progress.

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