Home prices dip, mortgage loan debt falls 2.5% yet households gain $1.2 trillion in new wealth

Despite massive unemployment and falling home prices, Americans have actually become more wealthy.

Huh? Are your kidding me?

According to the Federal Housing Finance Agency (FHFA), home prices in the third quarter fell by 3.2 percent from a year earlier. At the same time, the Federal Reserve says that in the third quarter America’s personal net worth increased by $1.2 trillion. The idea is not so much that income grew, instead what’s happened is that debts are declining:

  • Household debt contracted at an annual rate of 1¾ percent in the third quarter, the tenth consecutive quarterly decline.
  • Home mortgage debt fell at an annual rate of 2½ percent in the third quarter, about the same as in the previous quarter.
  • Consumer credit was down 1½ percent, after a decline of 3¼ in the previous quarter.

You can see the same sort of thing by looking at credit card spending. As the end of October credit card debt was valued at $800.5 billion. That’s a lot of money, but down substantially from the $957.5 billion that was outstanding in 2008. Reducing credit card debt by $150 billion likely lowers annual interest costs by $30 billion — money that can now be spent or saved on things more worthy than credit card interest.

Falling credit card use is a big deal because the Federal Reserve also reports that three-quarters of all non-cash spending is done electronically. So, if three quarters of all non-cash spending is electronic, and if credit card spending is down, have consumer purchase levels shriveled? In an economy which gets two-thirds of its purchasing power from consumers you’d like to see more consumer spending, especially spending which does not create additional debt.

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