US Household Wealth Suffers $2.2 Trillion Drop, Biggest Since 2008 Crisis

Happy Holidays! Feeling that Christmas spirit?

Amid the gloom there is what passes these days for some good news. In the grand tradition of Sherlock Holmes' 'The Dog That Didnt Bark,' real estate prices are NOT the culprit this time around. Americans appear to be reducing their mortgage obligations, though this can hardly be touted as a display of civic virtue: many of them of are being forcibly separated from their ownership obligations and some are simply abandoning them, with no forwarding address available.

The decline in household wealth, which is the worst since the financial crisis in 2008, can be largely attributed to falling securities values due to the impact of the ongoing European debt crisis. Blame may also be placed on the failure of some prominent government leaders to overcome their obsession with ideologically rigid and frequently moralistic austerity-based solutions. While some economists continue to tout this approach, a majority view the current trend as misguided.

The drama seems destined to play itself out until the adverse consequences of policy decisions or political gridlock become too obvious for even previously supportive voters to ignore. JL

Chris Isidore reports in CNN/Money:

Household wealth took its biggest hit since the height of the 2008 financial meltdown during the third quarter, weakened by a downturn in stocks, according to a report issued Thursday.

The Federal Reserve said the net worth of households fell by $2.2 trillion, or 4.1%, to end at $57.4 trillion. The decline comes to about $7,800 for every U.S. resident. It's the biggest decline since the $5.6 trillion loss suffered in the fourth quarter of 2008.
The drop in stocks in the quarter more than explained the overall decline in net worth, as the value of stocks held directly or indirectly fell by $3.2 trillion, or 17%.

That's a bit worse than the 14% decline in the blue-chip Standard & Poor's 500 index during the quarter. The period included the downgrade of the U.S. credit rating by S&P, along with rising worries about the risk of a new U.S. recession and a new meltdown in the financial sector due to the European debt crisis.

But U.S. stocks have performed well since the end of the third quarter, with the S&P 500 rebounding by 10.1% so far. So household net worth might be poised for a nice rebound.

The report also showed that the value of real estate held by households fell by $98 billion, but that was a drop of only 0.6%. Homeowner equity in homes fell by an even smaller amount, only $44.6 billion, as homeowners cut the amount of mortgage debt they owed.

Gregory Daco, principal U.S. economist for IHS Global Insight, said the report shows that a solid 2% gain in consumer spending in the quarter was being done by Americans dipping into their savings, not by any growth in income or net worth.