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					Household Financial Conditions: Q1 2007
June 13, 2007
During the first quarter of 2007, economic growth slowed to a crawl but FMC’s
indicators of household financial conditions recorded a symmetrical mix of gains and
declines from the previous quarter as well as the first quarter of 2006 and the 2000-
2006 period. Continuing declines in the growth of mortgage debt and residential real
estate values once again played a significant role in the movement of several
indicators.   Meanwhile, a slowdown in the expansion of financial asset values
contributed to a sharp drop in household net worth gains compared to previous-
quarter and year-ago levels.

Derived from Federal Reserve data (chiefly the central bank’s Flow of Funds accounts)
and updated on a quarterly basis, the indicators displayed on pages 2-3 track
movements in household wealth, income, debt, liquidity and risk.           They also
complement other analytical resources the Center generates from Flow of Funds

Over the course of the first quarter, household net worth grew at a relatively
restrained rate of 4.4 percent1 after expanding at a 9.6 percent clip over the preceding
three months and by 7.4 percent for 2006 as a whole. The January-March increase in
net worth was roughly in line with the average annual gain maintained between 2000
and 2006 (4.2 percent); however, this average was dragged down by an
unprecedented drop in household wealth over three consecutive years (2000-2002).
Over the 57 years since 1950, net worth has risen at a much more robust 7.5 percent
per year on average.

One of the biggest factors behind tepid net-worth growth in the first quarter was an
-11.6 percent contraction in the value of equities directly held by households. This
decline stemmed mainly from a record-breaking (-$831.0 billion) net sell-off of
corporate shares – the latest episode in a series of five consecutive quarters in which
surging company buybacks have prompted net household stock sales of at least -$690
billion per quarter. In addition, the value of pension savings – the single largest item
in households’ combined financial portfolio – increased by only 3.6 percent between
January and March.

Net worth gains were also restricted by the ongoing softness in residential real estate.
As weak demand and large inventories of unsold homes continued to plague housing
markets, the value of household real estate grew by only 3.6 percent during the first
quarter – the smallest increase since the fourth quarter of 1995.

The January-March decline in the growth of residential property value underscores the
end of an era in which home prices rose at an exceptional rate and accounted for an
extraordinary portion of household wealth gains. Between 2000 and 2005, the value
of household real estate skyrocketed by $7.94 trillion, which represented an
astonishing 41.6 percent of all increases in housing value from 1950 through 2005.
That $7.94 trillion also accounted for 76.7 percent of the overall expansion in
household net worth during the same six-year period.

As the housing bubble deflated, the annual increase in residential property value
shrank dramatically both in absolute terms (from $2.21 trillion in 2005 to $1.25 trillion
in 2006) and as a share of total net worth growth (from 58.6 percent to 32.9 percent

    Except where noted, all dollar amounts and percentages are annualized rates of increase or decrease.
Household Financial Indicators

Household Net Worth: Annual Growth Rate (percent)
 Q1 2007: 4.4  compared to    Previous quarter (Q4 2006)                                  9.6   u
                              Year-ago (Q1 2006)                                         11.6   u
                              2000-2006 annual average                                    4.2   t
                              1990-1999 annual average                                    7.9   u
                              1980-1989 annual average                                    9.2   u
                              1970-1979 annual average                                    9.8   u
                              1960-1969 annual average                                    6.2   u
                              1950-1959 annual average                                    6.6   u
                              Peak (1979)                                                15.3   u
Quarterly figures are annualized rates, not seasonally adjusted and not calculated on
a year-over-year basis.

Household Net Worth/Disposable Income (percent)
 Q1 2007: 567.5  compared to    Previous quarter (Q4 2006)                              572.8   u
                                Year-ago (Q1 2006)                                      567.3   t
                                2000-2006 annual average                                551.4   t
                                1990-1999 annual average                                522.8   t
                                1980-1989 annual average                                466.4   t
                                1970-1979 annual average                                453.6   t
                                1960-1969 annual average                                504.3   t
                                1950-1959 annual average                                495.7   t
                                Peak (1999)                                             629.0   u
Quarterly disposable income figures used in the calculation are seasonally adjusted
annual rates.

Household Net Financial Investment ($billion)
 Q1 2007: -453.8 compared to Previous quarter (Q4 2006)                           -1,086.6      t
                               Year-ago (Q1 2006)                                   -586.7      t
                               2000-2006 annual average                             -387.9      u
                               1990-1999 annual average                              130.1      u
                               1980-1989 annual average                              222.5      u
                               1970-1979 annual average                               80.0      u
                               1960-1969 annual average                               28.7      u
                               1950-1959 annual average                               12.3      u
                               Peak (1990)                                           333.2      u
Quarterly figures are seasonally adjusted annual rates.

Homeowners’ Equity/Value of Household Real Estate (percent)
 Q1 2006: 52.7   compared to  Previous quarter (Q4 2006)                                 52.9   u
                              Year-ago (Q1 2006)                                         54.1   u
                              2000-2006 annual average                                   55.5   u
                              1990-1999 annual average                                   58.8   u
                              1980-1989 annual average                                   68.1   u
                              1970-1979 annual average                                   67.9   u
                              1960-1969 annual average                                   66.5   u
                              1950-1959 annual average                                   77.0   u
                              Peak (1950)                                                81.5   u
Homeowners’ equity equals value of household real estate less households’ outstanding
mortgage debt.

Debt Service Ratio (percent)
 Q1 2007: 14.33    compared to               Previous quarter (Q4 2006)              14.49       t
                                             Year-ago (Q1 2006)                      14.29       u
                                             2000-2006 annual average                13.54       u
                                             1990-1999 annual average                11.69       u
                                             1980-1989 annual average                11.32       u
                                             Peak (Q3 2006)                          14.51       t
Debt service equals payments on outstanding mortgage and consumer debt as a
percentage of disposable income. Annual figures are calculated by averaging
quarterly data for the year.

Outstanding Household Debt/Total Household Assets (percent)
 Q1 2007: 18.6 compared to  Previous quarter (Q4 2006)                                    18.6   v
                            Year-ago (Q1 2006)                                            18.3   u
                            2000-2006 annual average                                      17.2   u
                            1990-1999 annual average                                      14.5   u
                            1980-1989 annual average                                      13.4   u
                            1970-1979 annual average                                      12.4   u
                            1960-1969 annual average                                      11.4   u
                            1950-1959 annual average                                       8.4   u
                            Peak (Q3 2007)                                                18.7   t

Net Household Debt Growth/Disposable Income (percent)
 Q1 2007: 7.8  compared to   Previous quarter (Q4 2006)                                   9.3 t
                             Year-ago (Q1 2006)                                           11.7   t
                             2000-2006 annual average                                     10.9   t
                             1990-1999 annual average                                      5.6   u
                             1980-1989 annual average                                      6.8   u
                             1970-1979 annual average                                      6.6   u
                             1960-1969 annual average                                      5.0   u
                             1950-1959 annual average                                      5.0   u
                             Peak (2005)                                                  13.4   t
Quarterly figures are seasonally adjusted annual rates.

Liquid Household Assets/Disposable Income (percent)
 Q1 2007: 75.0 compared to    Previous quarter (Q4 2006)                                  74.9   t
                              Year-ago (Q1 2006)                                          75.2   u
                              2000-2006 annual average                                    74.9   t
                              1990-1999 annual average                                    83.0   u
                              1980-1989 annual average                                    90.2   u
                              1970-1979 annual average                                    87.2   u
                              1960-1969 annual average                                    88.7   u
                              1950-1959 annual average                                    85.8   u
                              Peak (1988)                                                 94.6   u
Liquid assets include deposits, Treasury securities and agency securities. Quarterly
disposable income figures used in the calculation are seasonally adjusted annual rates.

Variably Priced Assets/Total Household Financial Assets (percent)
 2006: 32.7      compared to  Year-ago (2005)                  32.3                              u
                              2000-2006 annual average         34.1                              t
                              1995-1999 annual average         38.7                              t
                              1990-1994 annual average         27.5                              u
                              1985-1989 annual average         21.3                              u
                              Peak (1999)                      44.5                              t
Variably priced assets include corporate equities, mutual fund shares and holdings in
private-sector defined contribution pension plans. Flow of Funds releases only include
data for defined-contribution plans on an annual basis.

SOURCES: Board of Governors, Federal Reserve System, Flow of Funds Accounts of the U.S. and Household
Debt Service and Financial Obligations Ratios

in the same years). During the first quarter of 2007 the expansion of housing value
retreated further by volume – growing by only $165.0 billion (non-annualized) – and
as a share of total wealth gains. Indeed, over this three-month interval, increases in
residential property value accounted for only 28.1 percent of the total growth in
household net worth – nearly ten percent less than the 37.3 percent share that
prevailed for the 57-year period from 1950 through 2006.

Despite the continued slowdown in the growth of housing wealth and the massive sell-
off of corporate stock, households still managed to boost their net worth at a modest
pace by cutting back further on debt accumulation. Between January and March, net
new household borrowing rose by $770.7 billion, or 6.0 percent, the sixth consecutive
quarterly decline and more than a full percentage point less than the growth in net
new borrowing in the previous quarter.

The slowdown in household debt accumulation has stemmed almost entirely from the
end of the housing boom and the home-mortgage bubble that helped sustain it. With
the Federal Reserve hewing to a relatively restrictive monetary policy and housing
demand waning, new home mortgage borrowing increased by only 6.2 percent in the
first quarter – the smallest quarterly increase since 1998.2

Nevertheless, the growth in new mortgage borrowing still outpaced gains in housing
values. As a result, homeowners’ equity again diminished in relation to the value of
household real estate – from 52.9 percent in the fourth quarter of 2006 to a new low
of 52.7 percent in the January-March period. Since March 31, 2001, this ratio has
declined in 23 of 24 quarters, dropping from 58.1 percent to the current level. The
last time it rose was in the first quarter of 2005, when it ticked up from 54.4 to 54.6

Moreover, the first-quarter ratio of outstanding household debt ($12.94 trillion) to
total household assets ($69.61 trillion) remained at an exceptionally high level (18.6
percent), just one-tenth of a percentage point below the peak established in the third
quarter of 2006. If household assets were to grow over the next four quarters at the
same modest pace that prevailed between March 31, 2006 and March 31, 2007,
American households would have to reduce their outstanding debt by an improbable
$2.24 trillion in order to restore the average annual debt-to-asset ratio of the 1990s
(14.5 percent).3

Despite these cautionary signs, the continued deceleration in new borrowing did
produce salutary movement in some of FMC’s indicators. For example, household
debt-service ratios – payments on outstanding mortgage and consumer debt as a
percentage of disposable income – declined from 14.49 percent at yearend 2006 to
14.33 percent at the end of March. The ratio remains high by historical standards but
the 16 basis-point drop represents the largest quarterly decline since the third quarter
of 2001, when the U.S. economy absorbed terrorist attacks and the onset of recession.

Moreover, the ratio of debt accumulation to disposable income fell once again,
dropping to 7.8 percent during the first three months of the year from 9.3 percent in
the previous quarter. Between 2000 and 2006, the same debt-income ratio reached
double digits in each year, peaking at 13.4 percent in 2005.

Meanwhile, the slower pace of debt accumulation also helped improve households’ net
financial investment position – the difference between net increases in financial assets
and liabilities. While the position remained in deeply negative territory during the first

  By contrast, new mortgage borrowing expanded at an average annual rate of 13.7 percent from 2002 through
   According to the Flow of Funds series, which begins in 1945, there is no precedent for outstanding household
debt declining on a year-over-year basis.

three months of 2007 (-$453.8 billion), it still narrowed substantially from the
previous quarter’s -$1.09 trillion deficit.

What prevented an even more dramatic closing of the net financial investment deficit
was households’ continuing, large-scale sell-off of corporate equities (noted above)
and Treasury securities (-$204.9 billion). But despite the sale of Treasury debt,
households experienced no loss of liquidity, as the ratio of their liquid assets to
disposable income edged up one-tenth of a percentage point (to 75.0 percent) in the
January-March period. Consistent with similar increases in the recent past, the
principal driver of liquidity growth was an increase ($545.6 billion) in the holding of
time and savings deposits.

Meanwhile, the portion of household portfolios devoted to variably priced assets also
stayed fairly constant. During the first quarter, the share of outstanding household
financial holdings invested in equities and mutual fund shares (24.9 percent) rose two-
tenths of a percentage point over the comparable ratio for the fourth quarter of 2006.4

 Flow of Funds data are available only on an annual basis for holdings in private-sector defined contribution
pension plans, the third variable-priced asset included in the final indicator on page 3.


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