Friday, September 23, 2011

Household deleveraging continues (Updated)

- by New Deal democrat

The Federal Reserve's report on household debt burdens was released Tuesday, covering the April - June 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 yet again, as they have almost relentlessly since the end of 2007. Additionally, values beginning in 2008 were revised. This hasn't materially affected the peak values in 2007, but the decline since then is a little more pronounced. Here is typically where I would show you the snazzy updated graph, but the St. Louis FRED hasn't posted the updates yet, so here is the update from last quarter, with further explanation below:

UPDATE: Many thanks to the St. Louis FRED for updating this data after I kvetched:

Debt service payments (blue line, left scale) for the first quarter have been revised to 11.24%. In the second quarter they fell to 11.09%. They are now less than over 3/4's of the last 31 years -- all but the early 1980s and a few years in the early 1990s. Total financial obligations (red line, right scale) for the first quarter were revised to 16.26%. In the second quarter they fell to 16.09%. Thus, as of June 30 these were already less than at any time in the last 25+ years with the exception of one quarter in 1993.

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. A week ago, I said we wouldn't see a longer term recovery until households had adequately deleveraged, housing prices had bottomed at least nominally, as well as new housing beginning to pick up, and the Oil choke collar broken. It looks more and more like 2 of those 3 conditions will be met by some time next year.