Saturday, September 24, 2011

Household Debt Ratios Are Lowest Since 1990s

The chart above is an update of previous CD posts (most recent one here), showing the ongoing de-leveraging of U.S. households based on new data released yesterday by the Federal Reserve.

In the second quarter of 2011, household debt service for required payments on outstanding mortgage and consumer debt as a share of disposable personal income fell to 11.09%, the lowest ratio since the fourth quarter of 1994; and the ratio for all household financial obligations (adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance and property tax payments to the debt service ratio) fell to 16.09%, the lowest ratio since the fourth quarter of 1993. 

Let that be a lesson for Congress.....

23 Comments:

At 9/24/2011 12:45 PM, Blogger Larry G said...

holy moly! average debt actually REDUCES when a significant number of people have had their homes foreclosed and their cars repossessed!

EUREKA!

 
At 9/24/2011 1:38 PM, Blogger Buddy R Pacifico said...

The Google Trend Search debt consolidation(US) shows a steady downward trend for the couple of years.

 
At 9/24/2011 4:08 PM, Blogger Hydra said...

Maybe because they lost their home and mortgage?

 
At 9/24/2011 4:13 PM, Blogger morganovich said...

i suspect hydra has a point.

i wonder what this figure would look like if you added mortgage defaults back in.

credit card defaults, though a bit lower now, were running quite high as well.

that chart pattern could quite easily just be the result of defaults and actually a sign of people going bust as opposed to a sign of credit paydowns.

 
At 9/24/2011 6:00 PM, Blogger morganovich said...

in looking at this chart again, it seems that debt drops every recession.

it would be very interesting to see overall debt charted against bankruptcy, foreclosures, CC defaults, etc.

i'd be very interested to see how the nominal magnitudes change and their relative magnitudes.

 
At 9/24/2011 8:33 PM, Blogger PeakTrader said...

However, the national debt ratio is at the highest level since WWII:

The Lasting Cost of Debt
20 September 2011

Currently, total federal debt stands at $14.7 trillion, or around 98 percent of gross domestic product (GDP).

Federal debt financed by private investors, as opposed to held by government agencies, is about $10 trillion, or 67 percent of GDP.

In 2010, the net interest on the federal debt amounted to $196 billion.

 
At 9/25/2011 1:51 AM, Blogger Ron H. said...

morganovich: "that chart pattern could quite easily just be the result of defaults and actually a sign of people going bust as opposed to a sign of credit paydowns."

And yet, as the chart represents a ratio, it doesn't appear that such defaults resulted from loss of income.

Is this a sad comment on the consequence of loose lending standards? People borrowing more than they can afford to pay back?

 
At 9/25/2011 7:54 AM, Blogger PeakTrader said...

It doesn't seem consumer spending will pick-up soon:

First drop in household wealth in a year; stocks, home values dip; businesses hold more cash
September 16, 2011
Associated Press

Americans’ wealth declined this spring for the first time in a year, as stocks and home values fell. (And) corporations increased the size of their cash stockpiles.

The combination could slow an already weak economy because it implies that families have less to spend and businesses are reluctant to expand.

Household net worth dropped 0.3 percent to $58.5 trillion in the April-June quarter.

Consumers are already struggling with high unemployment and meager pay raises.

When people feel poorer, they spend less. That slows growth. Businesses then respond by cutting back on hiring and expansion plans. It can become a cycle.

Net worth is expected to fall even further in the July-September quarter because stocks plunged in late July and early August.

The S&P index has tumbled 11 percent since its April 29 peak, and 8 percent since the end of the quarter. That likely means an even larger drop in household net worth in the July-September quarter.

The likely drop in wealth comes at the same time that incomes are stagnating, particularly for middle-income households.

The report found household debt declined at an annual rate of 0.6 percent from the previous quarter, helped by a big decline in mortgage debt, which has fallen for nine straight quarters.

But the decline is deceiving. Mortgage debt is coming down because so many Americans are defaulting on payments and losing their homes to foreclosure, not just because people are paying off loans.

 
At 9/25/2011 8:20 AM, Blogger PeakTrader said...

We missed the opportunity for a V-shaped recovery in early 2009.

A significant tax cut, e.g. $5,000 per worker (or $750 billion for the 150 million workers at the time) would've jolted the economy into a virtuous cycle of consumption-employment.

Households would've paid-down or paid-off their highest interest rate debt to increase their monthly incomes and spending, and the banking system would've been strengthened.

Now, we need to cut government spending, cut taxes, deregulate, and overhaul government (i.e. increase efficiency) to spur growth.

 
At 9/25/2011 8:30 AM, Blogger PeakTrader said...

Here's what I wrote on Feb 2, 2009 (a $5,000 tax cut would've been better):

How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):

1. Obama should change his stimulus plan to a $2,000 tax cut per worker (in the form of a tax holiday), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

 
At 9/25/2011 11:15 AM, OpenID voxrationalis said...

"Let that be a lesson for Congress..."

Oh come on Mark, this is either intentionally misleading or ridiculously sloppy.

The drop is almost entirely due to falling interest rates. Household credit market debt outstanding (CMDEBT) hasn't dropped nearly this much - only 4.5% from its peak - and is slightly higher than it was in 2007Q1.

Don't believe it? Federal government net interest as a percent of GDP will be lower this year than in any year of the 1980s or 1990s. Does this mean the national debt's lower than it was during the 1980s and 1990s? Of course not.

 
At 9/25/2011 11:28 AM, Blogger morganovich said...

"And yet, as the chart represents a ratio, it doesn't appear that such defaults resulted from loss of income.

Is this a sad comment on the consequence of loose lending standards? People borrowing more than they can afford to pay back?"

ron-

i'm not sure you reasoning there holds.

let's say you and i have jobs making 50k and have 20k in disposable income.

let's say you have $50k in debt and i have $350k.

we have an aggregate debt to DI ratio of 10:1.

(400k/40k)

let's say i default.

that drives our ratio WAY up. now it's 1.25:1.

income changes had nothing to do with it. all that mattered is that my debt went away.

this same effect holds if i lose a $50k job and get foreclosed on a $300k mortgage.
so long as my debt exceeds my income (and almost all mortgages do) then you can't really see the income effect as it is swamped by the size of the debt.

 
At 9/25/2011 11:54 AM, Blogger marmico said...

The drop is almost entirely due to falling interest rates

Maybe, maybe not. There is a correlation between the year over year change in household credit market debt (CMDEBT) and household debt service payments as a percent of disposable personal income (TDSP).

FRED can whip up a chart PDQ.

 
At 9/25/2011 1:36 PM, Blogger Larry G said...

" Is this a sad comment on the consequence of loose lending standards? People borrowing more than they can afford to pay back?"

partly.

It used to be when you sat down to sign a paper that for 30 years you'd make monthly payments and that you believed you'd have a job for that 30 years.

all that has changed..

and once it did... change... many folks started seeing home ownership as more of a gamble, a calculated risk... rather than a 30 year promise to pay.

now - the idea that one would expect to remain fully employed for 30 consecutive years seem quaint.

 
At 9/25/2011 2:57 PM, Blogger Ron H. said...

morganovich: "let's say you have $50k in debt and i have $350k.

we have an aggregate debt to DI ratio of 10:1.

(400k/40k)
"

I understand, and agree with your explanation, but I believe the charts show household debt payments as a percentage of DI, not the actual amount of debt itself.

To me, the lower percentage indicates that if defaults are part of the cause, and I have no reason to believe otherwise, then people are defaulting even though they are still working.

Feel free to point out what I'm missing.

 
At 9/25/2011 3:23 PM, Blogger Ron H. said...

Larry: "It used to be when you sat down to sign a paper that for 30 years you'd make monthly payments and that you believed you'd have a job for that 30 years.

all that has changed..

and once it did... change... many folks started seeing home ownership as more of a gamble, a calculated risk... rather than a 30 year promise to pay.
"

Does that mean that when people sign a legally binding contract to pay some amount each month for 360 months, they have their fingers crossed behind their back?

"now - the idea that one would expect to remain fully employed for 30 consecutive years seem quaint."

Perhaps working for one employer for 30 years is unusual these days, but I don't think being employed for most of that time has fallen out of favor.

In fact, if anything, it seems people are overly optimistic about the future, if they sign up for more debt than they can handle - unless they just have no intention of keeping their word.

 
At 9/25/2011 3:52 PM, Blogger Larry G said...

" Does that mean that when people sign a legally binding contract to pay some amount each month for 360 months, they have their fingers crossed behind their back? "

worse than that... they're thinking "if this don't work out"... I'm not responsible...

I call them the scofflaw generation

"it's not my fault that the value of my house cratered so I'm getting out".

 
At 9/25/2011 8:52 PM, OpenID voxrationalis said...

marmico said... "Maybe, maybe not."

Okay, look at it this way. Perry's talking about de-leveraging, but he doesn't mention debt levels, either in absolute terms or in terms of income.

Huh?

He does, however, set up an equivalence between the current data and 94Q4 because debt service as a share of disposable personal income in the two periods are about the same. Only problem: leverage, as a percentage of income, is 30% higher today.

Kind of a problem, don't you think?

I'd set up the equivalence with 2004, when leverage was about the same as today. Debt service is 2.25% less today.

Sure seems overwhelmingly like an interest rate story to me.

 
At 9/26/2011 7:49 AM, Blogger Htowner said...

Wow, I don't know how most of you folks make it thru a day without slitting your wrists. Do you see ANY good news or do you spend your time manipulating EVERYTHING to make it into a negative?? Interesting and sad world view-makes for good table talk at parties-I guess?? This ain't rocket science-economy takes a downturn, folks become concerned-they pay off their debts. Interest rates at an all time low-they refi and pay down their homes...Note for you "negative Nellys": not everyone lives in CA, FL, etc where the things stink.

 
At 9/26/2011 10:18 AM, Blogger Jet Beagle said...

y G: "worse than that... they're thinking "if this don't work out"... I'm not responsible...

I call them the scofflaw generation"


I agree that the concept of personal responsibility has taken a huge hit. But I'm not convinced it is unique to any single generation. I've met Boomers, Generation X'ers,and Millenials who seem to have that atitude about their loans.

 
At 9/26/2011 1:45 PM, Blogger Jet Beagle said...

Larry G,

You probably know this, but some readers may not: an industry has developed to assist borrowers with "strategic default". One can simply Google "strategic default" and find websites for lawyers and authors who will help the borrower be rid of underwater mortgages.

Also, in some states mortgage loans are "non-recourse", so that lenders can seize the collateral - the home - but that's it. Bank accounts and automobies are off limits.

It is sad that attitudes towards obligations have become so relaxed. We'll all pay directly or indirectly for the increased risk which lenders are having to assume.

 
At 9/26/2011 1:52 PM, Blogger Larry G said...

@jet.. yup.. I'm aware....

I think people's attitudes have changed.. all generations....but especially so the younger ones.

we have lots and lots of "excuses" now days .....

I not that a large number of people who CHOOSE to drive til they qualify for a home.. say that they have "no choice" but to buy a home 50 miles from where they work and drive solo to work at rush hour every day - and complain about how the govt is not adding enough lanes to reduce congestion.

I have other examples... but basically people now days are not very responsible about their lives.

some depend on the govt but others hate the govt - and hate rules...

 
At 9/26/2011 5:27 PM, Blogger marmico said...

Apologies, I'm late back to the thread.

Sure seems overwhelmingly like an interest rate story to me.

Maybe, maybe not.

Household debt has declined 8.6% since the 2008Q3 peak. Disposable personal income has risen 5% since then.

Consumer interest rates (autos, credit cards, blah blah) ex-mortgages have not declined.

The preponderance of the evidence says that it is mortgage charge-off, consumer bankruptcy and government transfer payments not decline in interest rates that explains the decline in household debt ratios.

 

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