Household Balance Sheet Repair Continues

The following chart shows the ratio of household Net Worth to Disposable Income (NW/DPI), which reflects household balance sheets, and the personal savings rate. The purple line is the 25-year average of the NW/DPI variable. Courtesy of NAHB

National Association of Home Builders tracked data from the Federal Reserve's Flow of Funds and the Bureau of Economic Analysis to get a sense of how quickly households are paying down debts.

One of the factors preventing a robust economic recovery is deleveraging, as households and businesses pay down debts and restore net worth to long-run norms.

A consequence of deleveraging is an elevated personal savings rate, which holds down levels of consumption and investment and slows economic growth. It may take several years for the economy and housing to get back to the levels it had four years ago.

The Great Recession took a toll on household wealth. Peaking in the fourth quarter of 2006 at a value of 6.34 of NW/DPI (meaning households' net worth totaled 6.34 current income), that measure reached a minimum of 4.5 in the first quarter of 2009.

As a result of this decline in the conditions of household finances, the rate of personal savings increased from 1.8 percent in the third quarter of 2007 to a high of 7.2 percent in the second quarter of 2009. The rate then declined to less than 6 percent, but recently bumped up to 6.2 percent in the second quarter of 2010 as a result of mid-year stock market and housing price declines.

- Courtesy of NAHB