each year from 1997 to 2002. although the increases in home prices have slowed somewhat lately, the cumulative rise since the late 1990s has exceeded the growth in per capita income by a wide margin. all told, the ratio of household net worth to disposable income - a useful summary of the sector ’ s financial position - recovered last year to stand at a level slightly above its long - term average. before i turn to the business sector, let me address two concerns that have been voiced about the prospects for households. the first of these regards the low level of the personal saving rate. during the past several years, the personal saving rate has been in the neighborhood of 2 percent, well below its earlier post - world war ii average of nearly 8 percent. such low personal savings rates raise concerns that households may not be saving enough to meet longer - run needs, such as for retirement or college education of their children. what might be behind this paucity of personal saving? as recently as the early 1990s, the saving rate was near its long - run average. one reason that the saving rate fell during the 1990s was the rising stock market. higher equity prices led consumers to feel wealthier, which boosted spending relative to income and thus reduced the saving rate. in addition, the greater household wealth brought about by higher equity prices meant that any saving goals a family might have - such as for education or retirement - were closer to being fulfilled. hence, households would need to save less to achieve those goals. by this logic, we might have expected to see some increase in the saving rate in the aftermath of the sharp declines in equity prices in 2000, 2001, and 2002. it is true, as i noted earlier, that rising house prices cushioned these losses. but, on net, household wealth took a hit during these years without any commensurate rise in the saving rate. a key factor that has likely boosted spending - and thus held down saving - has been the low level of interest rates. the low interest rates have worked directly by stimulating spending in interest - sensitive sectors such as consumer durable goods. in addition, they have facilitated the restructuring of the household sector ’ s balance sheet, with a positive indirect effect on expenditures. in particular, over the past few years, homeowners have extracted a large amount of home equity through cash - out refinancing and home sales, which helped to support consumption despite the decline in equity prices. as i noted earlier, i do not

think that the household sector is overextended, and thus i do not believe that a large, autonomous increase in the personal saving rate is a serious risk to the economy. however, i would not be surprised to see the personal saving rate move up gradually over time to levels more consistent with its historical average. this rise presumably would be consistent with the expected shift in the pattern of growth in our economy - from an expansion that has been led mainly by the household sector to one led more by business spending. the second concern often expressed is that a bubble may have developed in house prices after several years of rapid increases. some of the measured price rise results from improvements in the quality of houses : houses are bigger and have more amenities than in the past, two characteristics that will lead to rising average house prices over time. but even after controlling for quality, increases in home prices have been outstripping general price inflation by a considerable margin in recent years. once again, the low interest rates are probably an important factor. houses, like other assets, generate an expected stream of future benefits. with low interest rates, these future benefits are discounted less heavily, which raises the asset ’ s price today. low interest rates also push up house prices by boosting the demand for housing. of course, some of that increased demand is being met by the rapid pace of construction of new housing. but building houses takes time, and in the interim, higher demand will push up the price of existing houses. although we can identify the key forces behind the rise in house prices in recent years, we cannot be sure that the increases are fully justified by the prevailing fundamentals. still, we need to keep the recent increases in house prices in perspective : although house prices have been outstripping broad measures of inflation - even after adjusting for quality improvements - their rise is nothing like the increase in equity prices in the late 1990s. in fact, the speculative forces that can sometimes drive equity prices to extremes are less likely to emerge in housing prices. first, buying and selling houses is a lot more expensive and cumbersome than buying and selling equities, which makes taking a speculative position in houses much more difficult. second, housing markets are much more local than equity markets, which are national, if not global, in scope. so if any speculative frenzy emerged, it would be much less likely to spread in the housing markets than in equity markets. finally, financial institutions have a much more disciplined process around the