Americans' net worth fell in 2008, erasing four years of gains, as the value of their houses and stock portfolios declined, according to new data from the Federal Reserve (.pdf file).
Household assets as a whole fell 15% to $65.7 trillion, unadjusted for inflation, compared with a decline of less than a percentage point to $14.2 trillion in total household liabilities.
The net worth of American households -- the difference between assets and liabilities -- was $51.5 trillion, down $11.2 trillion, or nearly 18%, from 2007. That sets Americans' total wealth back to levels lower than in 2004. It was the first decline in American household net worth since 2002.
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The Fed data signal the end of an era where Americans spent with an eye on their growing assets -- their homes, retirement funds and stock investments.
An increase in spending that accompanies such a perceived increase in wealth is known as the "wealth effect," and economists calculate that it led Americans to spend about $1.05 for every dollar gained. Now, as Americans' assets shrink, they are spending less.
"The hit to the American family is so broad and so deep," said Jane D'Arista, a research associate at the Political Economy Research Institute at the University of Massachusetts-Amherst.Mortgage credit fell to $10.5 trillion, the first decline since the Fed started keeping track in the 1950s, mostly due to the housing bust, foreclosures and tighter lending.
But other consumer credit rose nearly 2% to $2.6 trillion. Overall household debt increased by one-half percentage point -- 6.25 percentage points less than the increase the previous year.
Reflecting the diminishing value of their houses, American homeowners' equity as a percentage of the value of their homes fell to 43% in 2008, down nearly 6 percentage points from a year earlier. (The figure reflects those homeowners with mortgages and those who have paid their mortgages off.)
The value of Americans' stock market holdings -- direct holdings, mutual funds and retirement plans -- fell to $12.1 trillion from $20.6 trillion the year before, the lowest level since 1997. The stock market has fallen further this year, with the Standard & Poor's 500 Index ($INX) down 17.5% year to date.
As the stock prices tumbled, Americans have moved more money into banks. Total bank deposits rose nearly 5% to $7.7 trillion in 2008.
This article was reported by S. Mitra Kalita for The Wall Street Journal.