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updated 6/9/2011 2:17:46 PM ET 2011-06-09T18:17:46

Falling U.S. home prices have shrunk equity so much that the proportion of their homes that Americans actually own is near its lowest point since World War II.

Average home equity plunged from more than 61 percent at the start of 2001 to 38 percent in the January-March quarter this year, the Federal Reserve said in a report Thursday. That drop comes as home prices in big metro areas have reached their lowest level since 2002.

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The Fed's quarterly report shows how much wealth, or net worth, Americans have gained or lost. Net worth is the value of assets such as homes and stocks, minus debts like mortgages and credit cards.

Americans' overall net worth grew 1.65 percent in the January-March period, to $58.06 trillion, because of stock market gains. Stock values as measured by the Dow Jones U.S. Total Stock Market Index gained $970 billion last quarter. But since then, they've lost $651 billion through Wednesday's stock market closing.

The report showed that corporations are still hoarding cash. Excluding banks and other financial firms, companies held $1.9 trillion in cash at the end of the January-March quarter. That was slightly more than in the previous quarter and set another record.

The reluctance of companies to spend more of their cash stockpiles helps explain why job growth has been slow. U.S. employers added only 54,000 jobs in May, far fewer than the average of 220,000 they added in the previous three months. The unemployment rate is 9.1 percent, slightly higher than when the year began.

The Fed report showed that household debt declined in the January-March period at an annual rate of 2 percent from the previous quarter. That drop was due entirely to a decline in mortgages.

Story: Rate on 30-year mortgage rises to 3.90 percent

Auto loans, student loans and other consumer credit rose 2.4 percent — the second straight gain after nine consecutive declines. But analysts say the increase is driven by more people, many of them unemployed, borrowing money to attend school.

Average household wealth rose to $517,614 last quarter. It's risen nearly 19 percent from its early-2009 bottom. But it's still about 11.5 percent below its peak in mid-2007.

Normally, greater wealth would spark consumer spending. But their shrunken home equity is making many people reluctant to spend freely. That's holding back growth, because consumer spending accounts for 70 percent of the economy.

Debt now accounts for 119 percent of disposable income — down from a peak of 135 percent in late 2007. Many Americans are reducing their home mortgage debt because they're going into default on their payments and losing their homes to foreclosure.

"A lot of this debt reduction is not voluntary," said Dana Saporta, director of U.S. economics at Credit Suisse. "It's due to foreclosure activity."

The average household owes nearly $119,000 on mortgages, credit cards, auto loans and other debt, according to an Associated Press analysis of government data. That's down from more than $125,000 in 2008.

Normally when people pay down their mortgages, they see their home equity rise. But since the housing bubble burst in 2006, prices have fallen more than they did during the Great Depression. In many cases, people are paying off mortgage interest and losing equity at the same time.

There are 74.5 million homeowners in the United States. Nearly 25 percent of those homeowners are "underwater," which means they have negative equity in their homes, according to the private real estate research firm CoreLogic. Another 25 percent are nearing that point.

The outlook for the housing market remains dim.

Fixed mortgage rates have dropped for eight straight weeks. But most people can't take advantage of the low rates because they can't meet tougher lending requirements. Many who could afford to refinance did so last year, when rates hit their lowest levels in decades.

The biggest factor in the housing market's struggles is a wave of foreclosures. On Thursday, the Obama administration said the three largest U.S. lenders failed to help enough people permanently lower their mortgage payments so they could stay in their homes. The Treasury Department blamed the lenders for the failures of its widely criticized foreclosure-prevention program.

People took out mortgages at a dizzying pace during the housing boom. They made up 76.4 percent of all household debt in 2007, just before the country fell into the worst recession since the Great Depression. Mortgage debt has fallen since then. But it still represents about 72 percent of household debt.

Foreclosures have turned some healthy middle-class neighborhoods into lower-income communities. Homes in foreclosure sell at a 20 percent discount on average, which hurts prices throughout the neighborhood.

Many foreclosure sales have been delayed while federal regulators, state attorneys general and banks review how those foreclosures were carried out over the past two years. Once those homes are foreclosed upon, they will cause prices to fall even further.

Home prices are expected to keep falling until the glut of foreclosures for sale is reduced, companies start hiring in greater force, banks ease lending rules and more people think it makes financial sense again to buy a house. In some areas of the U.S., that could take years. 

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.35%
$30K home equity loan FICO 5.06%
$75K home equity loan FICO 4.50%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.86%
10.86%
Cash Back Cards 16.40%
16.40%
Rewards Cards 15.94%
15.96%
Source: Bankrate.com