Household deleveraging stalls

- by New Deal democrat

The Federal Reserve's report on household debt burdens was released last week, covering the July - September quarter of 2011. According to the bank,

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

With one important exception, both measures had declined almost relentlessly since the end of 2007 -- until now. Here is the updated graph:



Debt service payments (blue line, left scale) for the second quarter, which had been initially reported at 11.09%, were revised upward to 11.13%. In the third quarter they fell back to 11.09%. Total financial obligations (red line, right scale) for the second quarter, which had been initially reported at 16.09%. were revised upward to 16.15% and remained there for the third quarter.

While the debt service ratio, as presently reported, is still slowly declining, total financial obligations have completely stalled -- for a very interesting reason: as the Fed reported, total obligations for homeowners did continue to decrease, but rents have actually increased! Since the housing bust has pushed at least several million people out of houses and into rental units, for the last year rents have been rising. The YoY increased peaked in August at +4.6%, and as of Friday's November CPI report, is still +2.8%. Needless to say, this is going to continue to change the rent vs. own calculation in favor of ownership. If prospective home buyers become convinced that house prices are close to bottoming, that market could change quite swiftly.

I have no idea if this is merely a pause, or whether this will establish a multi-year bottom in household deleveraging. In the longer term, for a sustainable economic expansion, there must be adequate deleveraging by households, housing prices must bottom at least nominally as well as new housing construction begin to pick up, and the Oil choke collar must be broken. It does appear that very slowly all of those things are beginning to happen.

Household deleveraging continues

- by New Deal democrat

The Federal Reserve's report on household debt burdens was released yesterday, covering the January - March quarter of 2011. According to the bank,

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

Both measures declined substantially again, as they have almost relentlessly since the end of 2007. I've combined them into a single graph:



Both debt service payments (blue line, left scale) and total financial obligations (red line, right scale), are now less than about 3/4's of the last 30 years -- all but the early 1980s and a few years in the early 1990s.

If this rate of decline continues, then by the end of this year, both of these will be near their all time lows, and may surpass them by next spring.

As I have pointed out previously, a lot of this reflects refinancing debt obligations at lower rates -- which is why the overall debt owed by American households has not contracted nearly so much as the percent of disposable income needed to pay it.

In the longer term, this is good for households, and good for a sustainable economic expansion.

Household Debt and the Bankster-friendly Recovery

- by New Deal democrat

Economist's View reprinted a great article by the San Francisco Fed this morning, entitled Household Debt and the Weak US Recovery arguing that:

"problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery."
....
Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. .... Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.

Included is this great graph showing the debt-to asset and debt-to-income ratios of US households:


Notice that by this metric, relatively little has been done to discharge the huge run-up in debt amassed by US consumers during the Bush expansion of the first part of the last decade.

On the contrary, here again is the graph for debt payments as a percent of disposable income, as of the third quarter of 2010:



As I've noted before, the difference in the two graphs is the effect of refinancing existing debt at lower interest rates. I'm not sure how much longer the trick of refinancing can be used - unless mortgage rates are going to decline further to 3% or 2% like the Great Depression.

Which brings me to the final, depressing, point. On the one hand, the Panics of the 19th century ultimately did resolve themselves, however slowly, without "New Deals." So will this bust. On the other hand, it is a measure of how completely intellectually captured are the political elites in Versaille that while the banksters have been made whole, in the face of the worst downturn since the Great Depression, the only direct aid to consumers/households has been modest tax decreases, and the only aid directly for the unemployed has been the extension of unemployment benefits for some, but not all, long term jobless to a maximum of 99 weeks. The rest, as Atrios says, have been "rimshots" such as aid directed to the states for construction projects.

Meanwhile, the single most effective remedy for overextended household balance sheets - "cramdown" authority for bankruptcy judges to write down mortgages on primary residential properties - was tabled by a Congress with the biggest democratic majorities in decades, with the acquiescence of a democratic Administration. Three years ago we could debate the moral hazard and rectitude of such cramdown legislation. The San Franciso Fed's report shows just how huge a price the economy as a whole, and consumers in general, are paying for that choice.