Below I give you two related (and therefore similar) measures of household leverage: Household Debt Service Payments and Household Financial Obligations, each as a Percent of Disposable Personal Income:

hhld debt svc and fin obs

Each has hit a record or near-record low for the maximum observable period (regrettably only 33 or so years).

The question must be asked: Is the era of consumer deleveraging, which began just prior to the start of the reception, at an end?


Category: Consumer Spending, Cycles, Data Analysis, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Household Deleveraging: Almost Over?”

  1. Conan says:

    Thanks for an interesting chart. For the trend to turn you would expect it to bottom & turn or flatten out.
    So for now I would say no as the data is still in free fall, basically straight down, no turns of note. For now the evidence seems to support an unbroken trend down. When it starts turn, then I would be open to a contemplating a change in the trend.

  2. RW says:

    The period of mass household deleveraging appears to be nearing an end but with salaries stagnant (or falling) in real terms coupled to government failure in filling the output/demand gap during that period, it doesn’t seem likely that even a moderately deleveraged populace will be a driver of increased consumption going forward.

    I saw her today at the reception [or was that the recession – lol]
    In her glass was a bleeding man
    She was practiced at the art of deception
    Well I could tell by her blood-stained hands
    You can’t always get what you want
    You can’t always get what you want
    You can’t always get what you want
    But if you try sometimes you just might find
    You just might find
    You get what you need

    Just think how much further along we’d be if the Fed had just dropped all that money directly on the populace instead of a feckless bunch of bankers.

    • 873450 says:

      “Just think how much further along we’d be if the Fed had just dropped all that money directly on the populace instead of a feckless bunch of bankers.”

      At some point those projections will be published and a disgusted electorate will wholesale purge captured federal government for misappropriating the people’s treasure.

  3. DeDude says:

    I think we are looking at a mixture of baby-boomers who have decided to reduce their debt in preparation for retirement and younger people who are unable to qualify for loans. The later problem is easing up so the fall may continue at a less drastic pace. An actual reversal would not be likely until we get below 6.5% in unemployment and a combination of economic optimism and fear of increased rates get the younger people motivated to take on more debt.

  4. rd says:

    Both measures are a function debt payments, not total debt. Much of the deleveraging shown on the graphs is a function of defaulted mortgages and refinancing of mortgages with much lower interest rates. The total amount outstanding has probably not dropped anywhere near as much as this chart would lead you to believe.

    As long as interest rates stay low, people will effectively have deleveraged but house prices would likely reequilibrate lower to maintain these ratios if interest rates rise signficantly.

    • Frilton Miedman says:

      “Both measures are a function debt payments, not total debt.”

      Bingo, you posted this before I responded, both charts are reflective of service payments, not actual debt.

      Which really puts the Fes role in perspective.

  5. BennyProfane says:

    Shhh….Hear that? It’s the slow leak of any sort of consumer spending coming back and giving us 2004 again. It’s 10,000 Boomers a day turning 65. Yeah, I know, you usually hear that stated as “10,000 Boomers a day retiring.” Well, that ain’t happening, the retirement part, I mean, but, that can’t stop the march of time eroding their ability to maintain a credit fueled life. Old people can’t get hired if fired, and old people can’t get serious loans without major assets and investment income. There aren’t many at all who have the latter, and, they aren’t going to work forever. They can’t. And, they aren’t going to live forever. Without them, the most profligate spending generation ever, no way the consumer economy will justify a Home Depot and Lowes sitting right across the street from each other, a Starbucks on every corner, and strip mall after strip mall filled with useless stuff lining most major roads in suburbia.

  6. barbacoa666 says:

    Aren’t these measures of obligated payments, and not total debt? When reviewing household debt, it appears to me that the decrease is not as significant, which implies much of the reduction in obligations may be a result of lower interest rates.

    If that is the case, when interest rates rise, won’t obligations also start to rise?

  7. M Stewart says:

    Like rd said, a lot of this may reflect low interest rates. Could be that this chart will spike when interest rates rise, and that we still have a long way to go in terms of true debt reduction. It would be interesting to see how much outstanding consumer debt has been locked in at low rates (e.g., refinanced 30-year mortgages) versus adjustable (ARMs, credit card balances, etc.).

  8. boveri says:

    Thanks, a very important chart. Most probably hitting a bottom but that’s not the real news, which is that consumer disposable income is up and at a favorable level to support increases in retail sales and general growth in the economy.

  9. Frilton Miedman says:

    Someone jump in here, please correct me, either I’m missing something, or Invictus just made mistake…

    I think the two above charts may be the same thing, a reflection of debt service payments as a percent of disposable income – NOT actual debt/liability as a percent of income.

    The FRED chart linked below is total household debt, which has increased multiples (more than 600%) since 1980, much faster than inflation or wage growth, though wage growth should cut that in half, to about 300%, which would explain why percent of disposable income has levelled to service that debt, rates are less than 1/3rd what they were 30 years ago.

    The reason service payments are so low is that in 1980 a mortgage was 14%, now a mortgage is under 4%, even 3% for those with excellent credit.

    Adjust it for inflation and wage growth, the picture is nowhere near is pretty, even a small increase in rates would equate to massive cuts in consumer buying power.

    This is actual total household liabilities, unadjusted for CPI or wages.


    Again, anyone, feel free to correct me if I missed something, I think Invictus has made an erronious comparison. (though I generally like his blogs)

    • rd says:

      I don’t believe it is erroneous, just incomplete.

      For the purposes of today’s spending, the consumer has deleveraged significantly by reducing the monthly payments on debt through interest rate reductions. However, the total debt has not declined significantly with respect to income or assets so the economy is subject to interest rate shock in a big way if rates rise.

      Governments have the same problem. Debt financed with short-term instruments at 0% to 1% is really easy to accumulate. It would be much harder to pay off at normal interest rate levels or even 0% real interest rates.

      Meanwhile, back to the chicken versus the egg…….

  10. sudhir says:

    The charts sure are interesting, no doubt about it. However, in my opinion, these charts would make better meaning when co-related with the jobs created in the US during this period. As RD rightly implied, reduced debt obligations could be a function of written off mortgages and/or refinanced mortgages at lower rates and/or increased job creation helping actually pay down mortgages. Unless the southward direction of the chart is on account of increased payment abilities, any change in interest rate environment could end up reversing the direction of the chart as well.

  11. stoz78 says:

    I was initially surprised by these charts until I read a little more closely – unfortunately, neither of these time series measure household leverage, they both measure debt serviceability (i.e. interest payments to income rather than the outstanding stock of debt to income) so the title/commentary is somewhat misleading. The numerator in each case is driven by mortgage/consumer debt payments, which are driven by continued low interest rates.

    As an example, 30-year mortgage rates are up 0.6-0.7% since the last data point in these charts, so the lines will probably flatten out/turn up in the next couple of quarters regardless of what happens to the overall level of household debt – has the outstanding balance on anyone’s mortgage or credit card increased because interest rates have gone up? No. Neither had they decreased when interest rates were falling.

    The story is quite different if you look at leverage ratios (i.e. debt to income), which are less encouraging (though moving in the right direction) – e.g. here’s a chart I found from googling http://www.creditwritedowns.com/2012/10/us-household-debt-to-income-debt-servicing-cost-ratios.html . It illustrates that debt to income ratios are only back to about 2002-2003 levels and would suggest there are several years of de-levering left.

    The charts above do illustrate how far the Fed has gone to put money into borrower’s pockets, in so far as interest/repayment obligations are at the lows despite the stock of household debt being as high at 2006 levels. But the low is only relevant in the future if interest rates are at a ‘permanently lower plateau’ and what seemed like very high levels of debt 10 or 20 years ago will continue to seem like quite low levels of debt in the future.

  12. stonedwino says:

    Invictus has it right.There are things you guys with counter arguments are not getting at all. If you have not been in a position with a massive debt load and no real ability to pay it all and looked at either bankruptcy or an extended period of massive de-leveraging, then you don’t know what it takes to rid yourself of all that debt. We do…

    Here’s what you guys may not realize…There are those of us that had our highest debt levels when the downturn hit in 2008. In order to “fix” our balance sheets, during a period of lower wages and take home pay, we had to pay down some debt along the way, but we had massive debt settlements and write offs for a huge chunk of that debt…the only other option would have been bankruptcy.

    Our family has managed to settle over $250,000 in total debt for about $60,000 over the last 3 years. We have also totally paid off several other credit card accounts and both cars. Our de-leveraging has been massive! We may be the extreme example here, but we are certainly not the only one. The amount of money we dedicate to debt service payments now vs. 5 years ago is probably about 30% of the original amount. We have paid of or settled almost every account we have had. Just think of the money we saved not just on the principle, but years and years of additional interest payments.

    If you drew a chart, like the one above, to represent our household financial obligations over the last few years, it would be a much steeper curve and much deeper retrenchment. We will never borrow at even remotely the close rate we did for the last 20+ years and guess what? Our children have learned about massive debt as well…Household de-leveraging is not over. Boomers are cutting back, my Gen X crew is too and the younger kids are not adding debt, except maybe for student loans. I don’t think we will again, at least anytime soon, see the household debt levels that have been the norm over the last couple of decades. No mas…

    • cowboyinthejungle says:

      Interesting anecdote. According to the macro data I’ve seen, including the charts displayed and linked to above, your situation appears to be unique, rather than highlighting a trend. And if I may respond to your anecdote with one of my own, among my friends & family, which are solidly middle-class, and well below the wealth level of the typical reader here, I don’t see anything resembling your case. I see slow deleveraging among many families…slow because they are unwilling to take the significant reduction in consumption that is needed for more drastic debt paydown. I know a few who went bankrupt. I have not seen one case of debt relief via massive write-downs/settlements. Happy to hear that you have made this work for your situation, but can you point to any data that indicate it is more than an outlier in the bigger picture?

    • Frilton Miedman says:

      Kudos for the shrewd plan, but your anecdotal personal experience is not representative of the whole, at least not proportionally.

      Please, refer to the FRED chart I linked to above, TOTAL liabilities have come down, but nowhere near the impression Invictus’s charts would lead to assume.
      (again – http://research.stlouisfed.org/fred2/series/CCLBSHNO?cid=32258 )

      Both parameters he presented are representative of service payments as a % of disposable income, not total debt as a % of income.

  13. stonedwino says:

    June 17, 2013 at 10:09 am

    “Interesting anecdote. According to the macro data I’ve seen, including the charts displayed and linked to above, your situation appears to be unique, rather than highlighting a trend.” Indeed it is. I can explain why…

    The paralyzing fear most Americans have of damaging their “Credit Score” is what is preventing them from the type of aggressive debt write down and settlement we have gone through, which is really what we should all be doing to repair balance sheets, as fast as possible and get on with life. It is painful… We own a business and bankruptcy was an option- it would have killed our business. I can deal with my FICO in the dumps for a few years, especially so, since we are not planning on any borrowing or worrying about my credit score due to a job search, like the average stiff. I did what had to be done, credit bureaus and banks can go pound salt. I created my own fucking bailout, just like the TBTF banks and got a good pound of flesh from the same…how many of you can say you stuck it to the banks? Hehe…like James Brown said, “I feel good!”

    • cowboyinthejungle says:

      Seems you are being overwhelmingly lauded for your approach. And yet, to me it sounds simply like you’ve bargained out of debt…your own bailout, in your words. Maybe we should all have the “guts” to do that, but I personally take my debts owed to be my word. As long as I have the ability to pay them down, I will. That makes me a naive schmuck, I suppose. But I’ve been called worse.

  14. stonedwino says:

    FYI, I created a Soviet style 5 year-plan to eliminate all of our debt (except 1st mortgage) via debt write off, settlement or payoff. It has been a painful 5 years, but oh so worth it man…November 2013 will be the finish line for our 5 year plan and we are on track to have zero debt beyond our mortgage by then…most people could not have the vision, ability, know how or patience to do what we did – too bad for them.

  15. RW says:


    Really a shame that (a lot) more citizens didn’t have your playbook and the stones to implement it: We would have been out of this swamp by now and TBTF entities would have gotten the haircut(s) they earned.

    • constantnormal says:


      Are you sure that the powers-that-be would not have backstopped those “haircuts”? TARP springs to mind … and the cost pressures on the Bananamerican household are not abating, there is still plenty of cost pressure to push people into debt …

      Here’s some additional charts to throw out for discussion:

      this one shows that household debt obligations as a fraction of household financial obligations (which includes stuff like insurance, rents, etc) is still pretty much the same as it was in 1980 …


      this one shows that the pressures on US households have exploded since the 1970s, and it hasn’t all been bling (see subsequent chart link) …


      (adjusted the date range to be comparable to the next one)

      And while I could not find a constant-dollar household income chart at FRED, Google has one from the 2010 census data (using a different year for the constant-dollar, but the trends should be comparable) …

      http://goo.gl/0OfnY (pardon the shortened url, but the full url with all the parameters for the chart was a bit much)

      Anyhow, the net of all this is that I do not see the pressures to deleverage easing up in the foreseeable future … I sure hope all those links work …

      • RW says:


        Thanks for the links. I have little doubt companies judged ‘systemically important’ would have been fully backstopped — after Lehman nobody was going to fool with that — but don’t believe they would have profited so greatly thereby nor would bond holders have fared as well, much less equity holders.

        The pressure on the middle class has been increasing for a long time certainly — since Reagan if not Carter — but I wasn’t really aware of how badly things have been going for the past 40 some-odd years until I read Elizabeth Warren’s research; e.g., http://www.amazon.com/Two-Income-Trap-Middle-Class-Parents-Going/dp/0465090907/

        Here’s a video of her summary talk at a conference (about 4:45 minutes in), http://youtu.be/akVL7QY0S8A

  16. Pantmaker says:

    Yes…wow these charts seem to offer extensive graphical support that the stretched equity and bond valuations are completely justified. This is starting to look like an obvious launching pad for the start of a new secular bull phase. This administration is pure genius.

  17. bear_in_mind says:

    @stonedwino: You’re to be commended on “taking your medicine” and learning to live beneath your means. Been there, done that. Takes a kind of cognitive restructuring around your values to find peace with walking away from non-necessities. Bravo, sir!

    @Invictus: As others have observed, there’s something about this chart that doesn’t ring true. I suspect it is (unintentionally) skewed toward the very well-off who can easily carry large sums of debt because: 1) they’re able to access credit at ultra-low rates; 2) high net-worth households no doubt have refinanced any real estate holdings; and 3) a $10 million household can carry and service $1.5 million in debt a heckuva lot easier than a $50K household can service a $7.5K debt. IMHO.

    • Pantmaker says:

      Unfortunately most of these “haircuts” are being paid for by the American taxpayers as the government owns a ridiculous amount of CDO stuffed with sad stories. The hard choice isn’t debt relief…it’s to live a life with minimal debt and to pay off that debt in full and on time.

  18. stonedwino says:

    I never intended to skirt my responsibilities, but when shit hit the fan, I had to do what I had to do. Income was way down and my ability to service the debt as we had done up until then was out of the question. Banks and corporate America “restructure” debt deals all the time. We are made to believe that as regular citizens and small business people, we have to abide by a different set of rules than TBTF, because everything in life is dictated by the credit bureaus? Well, guess what? I said, screw that, made a plan for my own bailout and after taking some serious medicine for the last 5 years, I realized the light at the end of the tunnel not an oncoming train. Pfew…

    Most people would certainly not have the stones, poker-face mentality or mental fortitude to deal patiently with every creditor one by one, while driving a hard bargain.

    I came to the realization when the downturn started in 2008 and I looked at our situation, that it was not just another run-of-the-mill downturn and the best two things I could do was to drive a hard bargain in settling and paying off all debt (personal & business) and to cut our business overhead as much as possible, if we were to survive not only as a household, but the same went for our business.

    Granted my situation is unique, but I’ve seen and continue to see deleveraging by friends, family and especia

  19. stonedwino says:

    …and especially the small business owners I know and many I do business with myself…

  20. [...] (chasing yield) over consumption, which is why households have seemingly overshot the downside in deleveraging, with the debt service/disposable income ratio at 35 year lows. Further, bucking the theory, it’s [...]

  21. DeltaV says:

    Why do we think household deleveraging is over?

    Actually, why do we think it has begun, in any meaningful sense?

    1. Statistics supports that the bulk of household debt reduction has been due to foreclosures and short sales. These do accomplish debt reduction, but it is not clear to me that this sort of “point of the gun” deleveraging is really helpful for the economy.
    2. The reduction of interest rates to reduce debt service loads is, as several have suggested, deceptive as once interest rates increase this becomes a debt bomb… unless households actually deleverage. Which they have not — see item 1.
    2. All of the statistics regarding personal income, including disposable personal income, are very flawed. In fact, the vast majority of income gains in the last 5 years have accrued to the top 5%, and most of that to the top 2.5%. This is a segment of households that did not ever (before, during, or after the 2008 meltdown) have a significant debt problem, in proportion to income or net worth. Using average / total statistics of debt, income, and disposable income implies that the increased wealth / income of the top 5% will be donated to households with significant debt relative to income and net worth. I don’t see this happening. Instead, these statistics would only be meaningful if these were taken for each economic stratum of households (e.g., every 5% or 10%). They are available up to 2011, and are quite horrifying.

    I am deeply appreciative of Invictus’ efforts, here and always, but this is a particular annoyance of mine. Worse, until the Fed and others start to manage appropriately, instead of to the averages, the problems will get worse rather than better.

    Best regards,