Americans increased their net worth and reduced debt during the third quarter, according to the most recent Federal Flow of Funds report from Federal Reserve Bank. American household net worth increased by $1.2 trillion in the third quarter as a result of debt deleveraging. According to the funds flow report, the average household net worth was $54.9 trillion, up from $53.7 trillion in the previous quarter. Net worth is measured as the difference between household assets and liabilities. Household debt decreased at an annualized rate 1.75% during the quarter, compared to a 2.2% decrease in both the second quarter of 2010 and the third quarter of 2009. This is the tenth consecutive quarter decline. According to the report, household mortgage debt decreased in the third quarter as did the value of household real estate. Mortgage debt dropped 2.5%. The current Fed valuation of household real estate is $16.6 trillion, down 3.8% from the second quarter and down 1% from one year ago. A report by Capital Economics said, however, that households are not leading the trend to deleverage debt in the private sector. Rather, financial institutions are unwinding quicker than American homeowners. "The adjustment by financial institutions now seems to be coming to an end," the report said, adding that the size of the private asset-backed securities market is stabilizing at about $2.5 trillion, down from $4.5 trillion at its peak. "Banks have successfully reduced their reliance on short-term borrowed funds." Capital Economics said the latest rebound in household net wealth signifies a stabilization in household financial balance. Household financial balance refers to personal saving plus investments. "This is important because it means the pace of consumption growth should at least be able to keep pace with growth in disposable income," the report said. Personal savings (without consumer durables) in the third quarter totaled $325.8 billion. Personal saving now represents 2.9% of disposable personal income. In 2Q, personal saving was 10.5% of disposable personal income. One year ago, savings were 3.1% of income. The total domestic nonfinancial debt outstanding across all economic sectors was $35.9 trillion in the third quarter, $13.4 trillion of which was attributed to households. Write to Christine Ricciardi.