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HOUSEHOLD NET WORTH RISES IN Q3 ON GAINS IN REAL ESTATE VALUES By Mark Lieberman, Economist for the Five Star Institute Fueled by a $370 billion jump in the value of household real estate, household net worth grew $1.7 trillion in the third quarter to $64.8 trillion, the Federal Reserve reported in its quarterly Flow of Funds report. And, while the value of owner-occupied household real estate increased, total residential mortgage debt fell by $85.8 billion. As a result, owners' equity increased almost $390 billion. Homeowners' equity as a percentage of the value of the real estate rose to 44.8 percent, the highest level since 2007, according to the Fed's report. The report is the most comprehensive look at aggregate household and corporate balance sheets and income statements, a sort of blood pressure reading on the economy and its components. The third-quarter drop in mortgage debt marked the 14th straight quarterly decline. According to the Fed's assessment, aggregate mortgage debt at the end of the July-to-September period was $9.489 trillion, the lowest level in more than six years when homeowners owed $9.49 trillion and their equity represented 57.9 percent of the value of their homes. The improvement in household net worth more than reversed a $157.2 billion drop in the second quarter. An increase in net worth means assets grew faster than debts. The net worth gain is good news for a struggling economy according to the economic theory of "wealth effect," which holds that 28 consumers tend to spend more if they "feel" wealthier, even if income drops, and conversely, the opposite is seen when consumers "feel" less wealthy. Total household debt fell $10.9 billion in the third quarter, essentially flat in percentage terms, a decline of just 0.08 percent. Most of the change in net worth came from asset growth, attributable to the stock market. The value of stock holdings rose $524.4 billion in the third quarter, reversing a $386 billion drop in the second quarter. The "wealth effect" theory differentiates between growth in the value of real estate and growth in the value of stock market assets with the change in real estate values having a larger impact on spending. According to the Federal Reserve, disposable household income increased 0.5 percent, or $61.1 billion, in the third quarter of 2012 to $11.9 trillion compared with a 0.7 percent increase, or $85.4 billion, in the second quarter. Quarterly income growth since the onset of the Great Recession in December 2007 has averaged 0.7 percent including four quarter-quarter declines from the third quarter of 2008 through the third quarter of 2009. (Disposable personal income rose 0.3 percent in the second quarter of 2009). The slippage in personal income growth signals another challenge to an economy heavily dependent on personal consumption spending, which is more than 70 percent of the nation's gross domestic product. TRULIA: HOUSING RECOVERY NEARS HALFWAY MARK There's been much debate over whether the industry is truly in recovery-mode, but one company says not only are we in recovery, but we're nearly halfway to being fully recovered. The online real estate marketplace and data aggregator Trulia has been monitoring three key indicators for the past 18 months: delinquency and foreclosure rates, existing home sales, and construction starts. The company's analytics team compares current assessments of each indicator with their worst points during the housing crisis and their normal pre-bubble levels. As of October, Trulia says the housing market is 47 percent back to normal. In late November, Trulia released a report noting that its Housing Barometer posted its largest increase during the month of October since the company began measuring the recovery 18 months ago. All three key indicators showed significant improvements. At 10.64 percent, the delinquency and foreclosure rate was the lowest it's been in four years, falling from 11.27 percent in September and 11.88 percent a year earlier. Delinquencies and foreclosures were 41 percent between the crisis high and the pre-bubble norm as of October, according to Trulia. Existing home sales are faring even better, at 59 percent between their worst rates during the crisis and their norms prior to the bubble. Existing home sales in October 2012 rose to an annual rate of 4.79 million, a 2 percent increase following a decline in September. Construction starts also rose in October 2012, up 4 percent over the month to an annualized rate of 894,000. The year-overyear increase was a grand 42 percent, putting construction starts 41 percent of the way back to normal levels. Combining the three indicators, Trulia suggests the housing market is 47 percent back to normal. "Not only is the housing market closer to normal than at any other point since the crisis, the recovery is also accelerating," stated Jed Kolko, Trulia's chief economist, in a blog post Wednesday. STAT INSIGHT 242,000 New foreclosures showing up on credit reports during the third quarter of 2012. Source: Federal Reserve Bank of New York

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