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US household wealth falls for first time in five years

WASHINGTON – HOUSEHOLD wealth in the United States fell in the fourth quarter for the first time in five years, while borrowing slowed as home values plunged and lenders restricted credit, Federal Reserve figures have shown.

Net worth for households decreased by US$532.9 billion (S$739.5 billion) from the previous three months, the first decline since the third quarter of 2002, according to the Fed’s quarterly Flow of Funds report released on Thursday. Housing-related net worth dropped by US$176.4 billion.

Lower home and stock prices and reduced access to loans are prompting Americans to spend less, driving up foreclosures. A slowdown in consumer spending, which accounts for two-thirds of the economy, threatens to push the US into a recession.

‘Consumers are being squeezed from several directions,’ Fed governor Frederick Mishkin said in a speech this week.

Reduced household wealth, combined with a weakening job market and near-record fuel prices ‘are likely to restrain spending growth in the period ahead’, he said.

Owners’ equity as a share of their total real estate holdings fell to 47.9 per cent, the lowest since quarterly records began in 1951, from 48.9 per cent in the prior period.

The Fed based its calculations on a gauge of home prices published by the Office of Federal Housing Enterprise Oversight. Had the central bank used a measure of home prices developed by S&P/Case-Shiller instead, the loss in net worth would have been almost three times as much, according to JPMorgan Chase economist Michael Feroli in New York.

The drop in housing-related household net worth from October to December followed a decline of about US$600 million in the previous three months. Mortgage borrowing by households rose at a 5 per cent annual pace, the smallest gain since 1997.

Total borrowing by consumers, businesses and government agencies rose at an annual rate of 7.7 per cent last quarter compared with an 8.8 per cent gain the prior quarter, as borrowing by businesses climbed.

Total borrowing by households increased at a 5.6 per cent pace, and business borrowing rose at an annual pace of 12 per cent.

Borrowing by state and local governments climbed at a 7.6 per cent rate after rising 6.5 per cent the prior quarter, the Fed said.

Federal government borrowing rose at an annual pace of 5.1 per cent after increasing at an 8.8 per cent rate.

Source: BLOOMBERG NEWS (The Straits Times 8 Mar 08)


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