Household Sector Borrowing and the Burden of Debt

Article excerpt

The household sector incurred substantial amounts of home mortgage and consumer installment debt during the economic expansion of 1983--89. Household debts grew considerably faster than income, and aggregate debt outstanding relative to disposable personal income rose from 56 percent to 78 percent, which at that time was a record high. During the next three years, a time of recession and subdued recovery, debt accumulation slowed sharply. It began to pick up again in 1993 and by year-end 1994 had climbed to 81 percent of disposable income. At that point, home mortgage debt outstanding stood at $3.15 trillion and consumer installment credit exceeded $900 billion.(1)

The earlier buildup of debt and the recent resurgence have prompted questions about the financial strength of the household sector--its vulnerability to economic slowdowns and its ability to sustain spending levels that support economic growth. Aggregate statistics, such as measures of the household sector's loan-payment performance and balance sheet ratios, shed some light on these issues. Their usefulness is limited, however, because they provide no information on how debt is distributed among households that differ economically and demographically and how these distributions change over time. To enhance the interpretation of the aggregate debt statistics, this article draws on data on the debt obligations and characteristics of individual households at various points from 1983 to 1992, obtained through the Federal Reserve Board's periodic Survey of Consumer Finances.

The aggregate data show that after the surge of debt accumulation from 1983 to 1989 had elevated some indicators of debt payment problems, the household sector's financial condition began to strengthen: Ratios of scheduled debt payments to household income declined after 1989, and delinquency rates on mortgage and consumer debt dropped markedly. The household survey data, collected in 1983, 1989, and 1992, generally show the same broad trends. They also indicate that debt is concentrated among higher-income households and those with greater net worth and that between 1989 and 1992, the share of debt owed by households with high ratios of debt payments to income declined sharply. The surveys further suggest that for many households with high ratios, the condition is transitory: Most households with high payments-to-income ratios appear to reduce them over time.


Appraising the size and growth of household indebtedness is difficult without reference to other economic aggregates. The ratio of the stock of debt to disposable personal income, for example, is a common measure that serves to "rescale" debt relative to one indicator of the resources available to households for debt management (chart 1).


The aggregate debt-to-income ratio has several analytical limitations, however. For instance, it has serious shortcomings as an indicator of the drain on current income imposed by debt obligations, as discussed below. Also, by taking account of only debt and income, it excludes information on asset holdings, which also affect the ability of households to service debt. In addition, the debt-to-income ratio provides no direct indication of actual loan-payment performance.(2) Examination of other aggregate measures is essential to a better understanding of the household sector's financial situation. Three such measures are discussed below.

Debt-Service Burden

Because debt maturities generally range beyond several months--often to five years for automobile loans and to as long as thirty or even forty years for home mortgages--a relatively small portion of the stock of debt is payable within a one-year period. As maturities for specific types of loans change over time or the composition of debt by maturity class shifts, the near-term payments associated with a given level of the debt-to-income ratio will vary as well. …