Home Equity Down, While
Household Net Worth Is Up

The housing slump is slightly eroding a key driver of consumer spending, but stock-market gains are boosting the average household's net worth, new Federal Reserve data show.

Homeowners had $10.9 trillion in equity stored up in their properties at the end of the third quarter, an amount that was essentially flat compared with the previous quarter and down from a nearly 3% rate of growth during the same period last year, the Fed said. Home equity -- the difference between a home's value and the amount owed on its mortgage -- fell to 53.6% of the value of household real estate, down from 54% in the second quarter and 54.6% a year ago.

Steady home-price appreciation in recent years swelled the amount of equity built up in houses, and consumers tapped it to finance home improvements, college educations and other purchases. But the data from the Fed's "flow of funds" report suggest the housing market's slump has whittled away the growth of home equity.

So far, the impact on consumer spending has been modest. But many economists worry that further weakness in the housing market, particularly if it leads to an outright drop in house prices, could shrink home equity and lead consumers to pull back in the months ahead.

There are bright spots, though. The competitive labor market is boosting wages, and the stock market has produced big gains for many investors so far this year. After declining slightly in the second quarter, the value of household financial assets rose nearly 2% in the third quarter to $40.5 trillion, the Fed said. That combination helped lift household net worth, which was flat in the second quarter, by 1.5% in the third quarter to $54.06 trillion.

It looks like households are still in pretty good shape," said Robert Mellman, senior economist at J.P. Morgan Chase & Co. "The fundamentals for consumer spending are really quite good."

That may be true, but they also appear to be turning cautious. In a separate report yesterday, the Fed said consumer borrowing decreased by 0.6% in October, the largest monthly drop in 14 years. "In the grand scheme of things, households are stepping back a bit and being more conservative," said Daniel Jester, an economist at Moody's Economy.com.

Meanwhile, the Labor Department said the number of people filing initial claims for unemployment insurance fell by 34,000 last week to 324,000. Economists said the big weekly drop was because of seasonal factors surrounding the Thanksgiving holiday, which may have artificially boosted jobless claims last week. Over the past four weeks, claims have averaged 328,750, a level suggesting moderate growth in the job market. The Labor Department will release figures for November job growth today.

Email your comments to rjeditor@dowjones.com.