Posted by Mike Smith :: March 20, 2009 @ 12:45 pm

The Federal Reserve has been reporting household net worth on a quarterly basis for well over 50 years. Though household net worth has been declining for nearly two years, the fourth quarter of 2008 saw the largest drop ever: 9%.

In some ways, a decline in net worth doesn’t really mean that a household is worse off. Falling home valuations, which often constitute the largest factor to net worth, really only matter when you are trying to sell your home. Of course, as the value of a home relative to the balance owed declines, other constraints may be placed on the household, such as an inability to take out a home equity line of credit. Also, foreclosure proceedings or other financial difficulty could force the sale of a home, in which case the decline could have a real impact.

Rising unemployment is another likely contributor to the decline in household net worth. When a major income source is lost, assets such as bank account balances and emergency funds tend to decline and liabilities such as high interest credit card debt tend to rise. Both adversely affect net worth.

What does the latest decline mean in real dollar terms? First, we have to consider the average net worth in dollars. In February, the Survey of Consumer Finances was published using data from 2007. That report is published every three years. At the time, the average household net worth in the US was $556,000. That number is skewed by older households, as net worth tends to grow with age. For example, in households where the primary wage earner was under age 35, the average net worth was only $106,000. With the latest 9% decline, net worth has been reduced by about 20% since the 2007 peak. That means this latest 9% drop reduced the average household’s net worth by about $44,000.

Obviously, average values are probably skewed by the losses of households with higher net worth, so your decline was likely much less. Even so, the latest report is certainly a cause for concern. Net worth is just one metric for measuring your financial health, but keeping rough track of the number can give you a general idea of how your household economy is performing.

How has your net worth changed in the past three months?