- The Big Picture - http://www.ritholtz.com/blog -

Household Debt At Historical High

Posted By Barry Ritholtz On March 21, 2005 @ 6:58 am In Economy | Comments Disabled

Household_debtMarketWatch looks at consumer debt and determines that, despite record highs, its not a problem — yet:

"Low interest rates have spurred enormous borrowing by U.S. households. So much so that Americans are devoting a larger share of their disposable income to interest payments today than at the start of any tightening cycle over the past quarter-century."

Note that on 1985, the last peak in household debt, we were at a very different place int he Market cycle — namely, in year 3 of an 18 year bull run. I doubt that anyone (other than Don Hays) wants to argue that 2005 — the third year of the Bull dating back to October 2002 — is similarly situated.

Excerpt from MarketWatch: [1]

"Not since the late 1980s has household interest declined as a share of income. That was a period of record job creation and income growth. We are in a very different place today. American households are leveraged to the hilt — or at least (do households have hilts?) more than they’ve ever been. And households are more vulnerable to rate hikes than previously.

Mortgage interest accounts for more than two-thirds of household interest payments. Adjustable rate mortgages are far more common than at the start of the last Fed tightening [BR: Idiots]. Even a modest increase in U.S. interest rates could result in substantial increase in default rates. Banks historically respond to higher defaults by tightening credit standards, which reduces income growth, which pushes interest payments up relative to income — a vicious cycle.

But irrational exuberance, or outright economic distress, often is the motivation for credit card indebtedness. Credit card interest rates haven’t come down much, yet this type of debt has risen more than mortgages."

Why does this matter? Consider which is more significant to a family’s ability to spend — their interest rate, or the percentage of household income which that rate consumes. From a macro-perspective, low rates are irrelevant if the family budget has that much less disposable income left over. 

Consider this bit of rocket science: Credit card indebtedness has risen more than mortgages (Jeesh, that’s just unbelievable . . .)

The silver lining is that "household debt is not historically high relative to household assets. From a balance sheet point of view, things look much better." The risk is a decrease in the value of those assets, i.e., Real Estate prices drop as interest rates tick up.

If things turn sour, this will make the trough that much worse . . . 

Household debt at historical high [1]
By Peter Brimelow & Edwin S. Rubenstein,
MarketWatch 12:01 AM ET March 21, 2005 

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/03/household-debt-at-historical-high/

URLs in this post:

[1] MarketWatch:: http://www.marketwatch.com/news/story.asp?guid=%7B3CC7229D%2D2750%2D4B0B%2DA721%2DAD323B9ABA54%7D&siteid=mktw&dist=

Copyright © 2008 The Big Picture. All rights reserved.