Mortgage debt is down, Americans' net worth up, but analysts call gains fragile

An increase in household net worth appears to be improving the financial condition of American families, but slowly.

That's the message from a report released Thursday by the Federal Reserve, which showed a rise in household net worth and a decline in the level of mortgage debt.

The Fed’s report follows less than a week after the Labor Department reported that the unemployment rate rose in May to 9.1 percent, a sign that the economic recovery is still fragile and hasn’t reached all American households.

In this year's first quarter, the total of all US mortgage loans fell below $10 trillion, after being above that level for about four years, the Fed reported. Family assets rose in value, as a fall in home prices was more than offset by gains in financial assets like stocks and mutual funds.

The net worth of all US households reached a total of $58 trillion, up about $1 trillion from the previous quarter. Essentially, American net worth is back to 2005 levels, but still below its 2007 peak of $64.2 trillion.

A catch: As of Thursday, the stock market has lost value since the beginning of April, so economists say the next quarterly numbers probably won't be as positive.

"Private finances are slowly improving as deleveraging continues and the labor market improves," Gregory Daco, an economist at IHS Global Insight, wrote in an analysis of the new numbers. But without more gains in financial assets, he said, "the depressed housing market will be a drag on household net worth in the second quarter."

The overall numbers mask a wide disparity in the financial health of US households, which vary widely based on families' levels of income, debt, and ownership of homes or stocks.

A separate report earlier this week, from the information firm CoreLogic, estimated that 22.7 percent of US mortgages are "under water," with the borrowers owing more than their homes are worth. That's a bit lower than in last year's fourth quarter. And when the five hardest-hit states are excluded (those are Nevada, Florida, California, Arizona, and Michigan), that percentage falls to 16 percent.

Across the US, many households have "deleveraged" by either paying down debts or defaulting on home loans.

Another challenge for households is that when they do want to borrow, it can be hard to obtain credit. Banks are cautious about making new loans when home prices may fall further and many properties are still in the foreclosure pipeline.

Still, banks are expanding their loans to businesses, and other loans to consumers (such as credit card debts) have been rising as well.

Although many households have too much debt, relative to their income, the general availability of credit is an important indicator – with new loans and economic growth typically rising hand in hand.