Household wealth in the U.S. climbed in the fourth quarter, propelled by a gain in home prices that is helping repair family finances.

Net worth for households and non-profit groups increased by $1.17 trillion from October through December, or 1.8 percent from the previous three months, to $66.1 trillion, the Federal Reserve said today from Washington in its flow of funds report.

Household wealth is climbing back to its pre-recession level as the recovery in home values helps Americans overcome higher taxes Congress put in place this year. Federal Reserve policy makers’ plans to keep lending rates low may continue to shore up finances, giving consumers the confidence to keep buying big-ticket items including cars and homes.

“Growing wealth makes people more apt to spend,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report. “Part of the Fed’s grand plan is hoping that the wealth effect helps growth.”

The value of financial assets owned by American households, including stocks and pension-fund holdings, increased by $784.4 billion in the fourth quarter, today’s Fed report showed.

The gain this quarter may be even bigger as investors have taken tax increases and federal government budget cuts in stride. On March 6, the Dow Jones Industrial Average closed at a record, and the value of U.S. equities has now increased by $1.44 trillion since the end of 2012.

Household real-estate assets climbed by $417.5 billion, according to today’s flow of funds data. Owners’ equity as a share of total household real-estate holdings increased to 46.6 percent last quarter from 45.2 percent in the previous three months.

Housing Recovery

Underpinning those gains, the housing market is making its way toward recovery. CoreLogic Inc. said last month that the national median single-family home price climbed 10 percent in the fourth quarter from a year earlier, the biggest gain since 2005. Single-family home prices rose in almost 88 percent of U.S. cities in that period as the recovery broadened.

Improving residential real-estate values may support the economy even more than gains in equities. Economists Karl Case, John Quigley and Robert Shiller found that changes in house prices -- and in real estate wealth -- have a bigger impact on consumer spending than the ups and downs of stock prices and financial wealth. Case told Bloomberg News last month that consumer spending would be boosted by $80 billion in 2013 by the rise in home values that has already occurred and homeowners’ expectations that additional gains will come.

Auto Sales

Automakers are among those benefiting from improving household balance sheets, which is helping support sales beyond car-owners’ need to replace older models. Cars and light trucks sold at a 15.3 million annualized rate in February, capping the best four months since 2008.

“In addition to the pent-up-demand story that we have in terms of replacement, the housing-sector recovery is important too,” Jenny Lin, senior U.S. economist at Ford Motor Co., said during a Feb. 1 sales teleconference. “That makes the household balance sheet a lot better and that would improve the wealth effect here.”

Central bank officials are looking to spur the expansion by holding interest rates low, thereby stimulating equity and real- estate markets and bolstering household wealth. The Federal Open Market Committee in January affirmed plans to keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.

“Even if the interest rate channel is less powerful right now than it was before the crisis, asset purchases still work to support economic growth through other channels, including by boosting stock prices and house values,” Fed Vice Chairman Janet Yellen said earlier this week. “The resulting improvement in household wealth supports greater consumption spending.”

More Borrowing

As household wealth improves, Americans are gaining confidence to borrow. Today’s flow of funds report showed household debt increased at a 2.4 percent annual rate from October to December, the biggest advance in almost five years. Mortgage borrowing fell at a 0.8 percent pace, the smallest decrease since the first three months of 2009, the last time it rose. Other forms of consumer credit, including auto and student loans, climbed at a 6.6 percent pace, the most in five years.

Total non-financial debt increased at a 6.4 percent annual pace last quarter, led by an 11.2 percent advance by the federal government and an 8.7 percent gain among businesses. State and local government borrowing dropped at a 3.7 percent pace.

Gains in pay are helping consumers meet their loan payments even as debt climbs. Mortgage and consumer-loan payments in the third quarter amounted to the smallest share of after-tax income since 1983, according to Fed figures issued in December. The debt-service ratio was 10.6 percent of disposable income from July to September. Five years earlier, the figure peaked at 14.1 percent.