Fed: Household Debt Service and Financial Obligations Ratios
Submitted by
CalculatedRisk on Wed, 09/19/2007 - 9:07am (55 comments)
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I really wonder about the accuracy of these numbers. They admit themselves that they don't have all the data they need.
Also, how quickly can these percentages RISE because of loss of employment, even in the face of decreasing debt through BK, etc.
Just a hunch, but I would assume, and I could be wrong, that it takes about 6-9 months to start to see some effects of new policies or change in spending habits by the consumer to show up in these numbers.
I don't think any of these stats matter much anymore. The negative savings rate didn't do anything for our leaders to even bat an eye. All they care about is the amount of money that consumers throw at the economy.
Spend, spend, spend!!!!!!!!!!
for CR: charles hugh smith-archive
After several years of the homeowners financial obligations ratio (FOR) increasing rapidly - due almost entirely to increases in mortgage obligations - it appears the FOR might have peaked at the end of 2006.
Even if near record levels - this is good news. I agree it will take years to work down but at least it appears to have started. The 1000 mile journey starts one step at a time.
Robert Shiller warns of pending shocks.
FT.com / US / Economy & Fed - US expert warns of fresh shocks
US expert warns of fresh socks
WTH?
I really wonder about the accuracy of these numbers. They admit themselves that they don't have all the data they need.
Also, how quickly can these percentages RISE because of loss of employment, even in the face of decreasing debt through BK, etc.
WTF, that's the second time i've hit refresh only to have a previous comment posted again.
It could be that I'm using Konqueror, but I never have this problem elsewhere...
dryfly, that was my reaction too. Watching this ratio increase was scary, now that it appears to have stabilized, the slow and probably painful process of working off the debt binge has started.
Matt, if you look at the '90 / '91 recession, the ratios declined during the period of economic weakness. This is probably somewhat because of BKs and foreclosures (less debt), but I'd guess the decline was mostly for two reasons: interest rates fell and people stopped borrowing more debt.
Declining interest rates probably won't bail out households this time. It will probably take rising incomes while the debt load doesn't increase.
Best to all.
I've read a criticism of the US government saving rates statistic is that it does not include 401K or 403b accounts. Can anybody direct me to a definitive answer of what is included in the savings rate stat?
If it's true, then I'm in the zero savings camp. If not true, then this particular stat could be a lot scarier than I realized.
TIA,
Robert Shiller warns of pending shocks.
31d8ab...00779fd2ac.html
FT.com / Registration / Sign-up
Anonymous | 09.19.07 - 2:03 pm | #
Who cares! "Where's that rum jug? Come 'ere you wench!"
Looking at the absolute numbers in the graph, 18% of DPI dedicated to mortgage and consumer debt, it's tempting to say 'where's the problem?' Spending 12% of your DPI on a mortgage is pretty darned manageable. I know it's an average but I was expecting to see much higher numbers.
The joint economic committee heard from experts who said a 15 per cent fall in house prices would wipe out $3,000bn of household wealth...
The Federal Reserve will undoubtedly take aggressive actions, which will mitigate its severity. But, if home price deflation persists or intensifies, they may discover that the Achilles heel of this resilient economy is the evaporation of confidence that can accompany the end-of-boom psychology, he said.
I guess I don't really understand the point of this.
The value created by the housing bubble is just an illusion produced by the markets. It's almost as if people think there's some way to rescue it.
There's no way to make this value real because a guy with no job, no income, and no assests will never be able to pay off a loan.
The best we could do is devalue the dollar to hold up prices, but this is simply replacing one wealth illusion for another. I suspect the real goal here may be to redirect tax revenue to housing, but that has it's own consequences.
I personally don't like any talk that doesn't acknowledge the reality of the matter because that's how we got here to begin with.
Uninformed people are easy to con.
Given the percentage of homeowner debt tied directly to RE, any uptick in the FC rate is bound to show through these numbers as those debts get 'discharged' up the food chain. This process will really only start appearing with 4Q data, I think.
1981 was an interesting year for the housing market and also marked the start of a recession.
It is partially repsonsible for me being a bit less stagflationary today (although I'm not willing to change my name yet, lol).
Being mostly out of my shorts I am now puzzled:
Have we just seen the peak ????
"We have been waiting for war, pestilence and famine, and it looks like it has arrived," Kovacevich [of Wells Fargo] said at a Bank of America conference in San Francisco monitored by Webcast.
I notice he forgot 'death'. Just a slip, I suppose.
Maybe I'm being dense right now, but could you remind me what the FC rate is.
Won't the new BK laws keep a lot of people from erasing their debts if they have income. Doesn't the debt transfer to the Gov.(IRS?)?
I'm assuming that debt owed to the IRS doesn't show up in these numbers, is that correct? Won't that be increasing anyway for people with assets that are writing off mortgage losses.
wally,
LOL!
Being mostly out of my shorts I am now puzzled:
Have we just seen the peak ????
That's how it usually works.
In the past I've found that I'll usually cover my shorts in frustration just as the market is rolling over, so now I come here and complain about Fed policy instead of hitting the "buy" button.
For all my griping, my bottom line is doing alot better.
Again, that's where being properly capitalized is so important - you can grin and bear it while you wait for reality to work its magic. Also this is where it really helps not to concentrate in individual stocks too much.
. . . the Achilles heel of this resilient economy is the evaporation of confidence that can accompany the end-of-boom psychology."
That's the key, in my view. Economic Katrina: the Fed, Congress, the Executive Branch -- they can't help. They can talk, sure, but they can't fix the mess. You're on your own.
I guess I don't really understand the point of this.
It's pretty simple. Before this debacle is over, there will be a fiscal bailout, sadly.
Might we add a marked decrease in personal spending/consumption to your increase in income, decrease in debt, or decrease in interest rates?
We have survived (at least part of) a credit crunch and a housing debacle and (you name it). But it might really be TEOTWAWKI if Americans started saving.
It includes renters who have no mortgage and about one-third of people who have paid off homes in full (mostly elderly).
I have a problem with looking at just one asset class in isolation. One person may carry a large mortgage so as to invest in (say) emerging market equity while another may feel it is prudent to pay off a mortgage before making other investments. There are pros and cons to each choice and each person could have the same overall equity and income but the effect on this chart would be very different.
IMO, debt levels need to be analyzed together with total net worth to measure the overall economic health of a population.
The numbers are worse than they look because disposable personal income is defined as after-tax. In 2001 and 2003, Americans got big tax cuts so the lines should have dipped in those years. But they didn't.
Remember...the blue line would be much higher if it only included people with mortgage debt. It's all mortgage debt divided by everybody.
It includes renters who have no mortgage and about one-third of people who have paid off homes in full (mostly elderly).
No, 18 is the homeowner ratio. Homeowners and renters are treated separately. Link
I've read a criticism of the US government saving rates statistic is that it does not include 401K or 403b accounts. Can anybody direct me to a definitive answer of what is included in the savings rate stat?
No definitive answer here but I think that is a canard. The savings rate doesn't include or ignore 401K - they don't matter... or rather don't pertain until gain is realized.
Savings rate is total of regular income minus consumption... it, in effect, gets at savings backwards which in reality makes it a lot easier and more accurate to calculate. Instead trying to determine what is and isn't savings adding it up... they calculate total income (pretty easy) and total calculate consumption (also pretty easy) and find the difference... what's left is savings.
The reason it is negative is we have been borrowing (from our homes mostly) and spending that along with a lot of our regular income & previous savings more than we have been adding to savings or stashing in places like 401Ks.
So while contributions to 401Ks count as savings their unrealized gains aren't counted either way until they get realized and not even then if considered 'interest' which I believe thy aren't - they are withdrawals... so if the 401K goes up that gain isn't counted until it's withdrawn as income. Same if it declines... the loss wouldn't show up on income balance until realized.
It makes almost perfect sense really. I say almost because the weakness I see in it is that it doesn't include 'interest' or 'rental' income. Why? I don't know.
Source
Missing in this report is the staggering rise in insurance and property tax burdens for many homeowners.
While there have been decreasing property values in many area's in the country, the decrease in taxes has yet to follow.
hiker 90
When you understand how personal savings works, the low savings rate gets scarier. It is built from the Personal Income and Outlay Account, which does include your own personal savings in the 401(k)and also "employer contributions for employee pension and insurance funds."
It even includes employer contributions for government social insurance (i.e., FICA).
After 401(k), matching contributions and FICA, Americans still aren't saving anything net.
http://www.bea.gov/bea/an/nipaguid.pdf
From the AP:
Moody's Investors Service Says Bad Mortgage Credit Persists
NEW YORK (AP) -- Moody's Investors Service said Wednesday bad credit persists among mortgage borrowers and will probably lead the ratings agency to downgrade the credit quality of more debt.
Moody's said people who borrowed money to buy homes in the past two years continue to miss payments on their loans. This coupled with sinking home prices is eroding the collateral used to secure certain classes of bonds.
Moody's has already downgraded or flagged 496 classes of bonds issued last year. The agency said it will continue to monitor credit trends to determine whether more downgrades are necessary.
To clarify,
Personal contributions to 401(k)s are considered part of the bottom line of the Personal Income and Outlay Account ("Personal Savings").
Employer plan contribubutions are a component of Personal Income. Included.
Appreciation in 401(k)assets is not included...correct.
CR,
Hopefully you can clear something up for me so that I can better understand it.
I was under the impression that the leftmost Total FOR is for both renters and homeowners. That's what I've been using for my own chart (doesn't have the same purpose yours does, since I'm more concerned with debt in general). Am I correct?
If I am correct, why is "consumer debt" sitting over there with homeowners? Surely renters have consumer debt too. The way they laid out this data is rather confusing (to me at least).
Or is it simply that this report is mostly concerned about homeowners and their ability to pay their mortgage (with renters being somewhat of an afterthought)?
Personal Savings Rate from here:
The Bureau of Economic Analysis starts with personal income, which includes wages (from a job or self-employment), dividends, interest, rental income (if you are a landlord), and employer contributions to health and retirement plans.
From this it subtracts income tax and the employee's share of payroll taxes. The difference is disposable personal income.
From this it subtracts consumer non-investment expenditures, including retail sales, utilities, interest payments on consumer debt, and money people send to friends and relatives overseas.
For housing, the bureau counts rent for renters or mortgage interest, property taxes and insurance for owners. It does not subtract down payments or principal payments on a house.
What's left is personal savings.
CR - "Declining interest rates probably won't bail out households this time. It will probably take rising incomes while the debt load doesn't increase."
Just my opinion, but we may have to pay down a large chunk of our debts the old fashion way, because it make take a while for incomes to rise CR. Everything I've read recently seems to be saying that there is minimal wage pressure these days. This seems to be the case primarily because of the disinflationary effects of low cost imports and low cost sources of (international) labor.
If so, any spike in inflation may only serve as a backdoor lowering of American's standard of living, and no help at all on debt loads, if wage increases continue to be AWOL.
Carlin,
The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases.
To add to dryfly's comments, there are two camps wrt to savings: the economic fundamental camp (S=I-C) and the balance sheet camp. The balance sheet camp wants to count 401K and home equity and whatever else. And like dryfly said, a lot of the value in those assets are unrealized. My concern for a while has been that a lot of the value people are counting as savings will never be realized. Thus a lot of people will be terribly hosed when the time comes that they think they should be able to stop working - because they haven't putting away real, out-of-current-income savings. And a lot of people will figure this out about the same time as the SS surplus disappears. Rut-roh...
Incomes go up?
As the dollar crashes?
Maybe or maybe just the debt depreciates in value.
Yea I am a cynic, having lived the life of a outsourced IT professional for the last 6 years and watching jobs go offshore. Yea the $ down is supposed to bring those jobs back, but I do not see income increases helping much. The attitude of the elites is that the solution is to pile on more debt, that paradigm has to change.
Of course as financial chaos spreads through the system and panic sets in, maybe it will.
Saw a CNN report that after electing Bush and Co to dismantle any effective government regulation of products, after a lot of bad press on deadly to harmful imports as well as lawsuits, the elites of industry want more govt regulation.
by this reasoning then 401k contributions certainly do not appear as savings because they reduce AGI dollar for dollar.
so what the hell good is this as a metric?
"1981 was an interesting year for the housing market and also marked the start of a recession."
Of course 1981 came at the end of a period of quite high inflation. Around 1979/80 inflation was so high that Volker had to clamp down on the money supply and send interest on long term US bonds up to 14%. The recent runup in home prices has come during a period of quite tame inflation. Not similar.
"being mostly out of my shorts ..."
That's an excellent way to cool down.
James,
It seems very similar to me. In both cases, interest rates rose to the point something broke.
Why did it break so much faster this time around? I'd argue because we have fallen in love with leverage (debt).
I think this latest housing bubble at 6% interest is worse than the 1981 housing bubble at 15% interest. Once again, due to leverage.
Of course, I could be wrong. We shouldn't have to wait too long to find out.
Dryfly, Rich, Steve, FF,
Thanks for responding. Unfortunately, I'm gonna have to digest the info and sources late tonight after work and the kids are tucked in. My appreciation of this blog and all of it's contributors continues to grow.
Cheers,
hiker90,
let us know when you're checking this from your blackberry while driving. then you're hooked.
Perhaps I'm missing something, but Bernanke's comments to Barney Frank in a letter released yesterday seem a recipe for disaster.
Also in the letter, Bernanke said that Fannie and Freddie need not expand their investment holdings for the mortgage finance companies to buy up more subprime loans.
"The GSEs could modify their asset mix under their existing portfolio caps by selling some of their substantial holdings of GSE-guaranteed mortgage products, which are easily placed in the private secondary market," Bernanke wrote.
Is he really suggesting that they sell good assets to raise cash to buy bad assets nobody else wants? I know GSE's serve two masters, but methinks it's time for shareholders to abscond as their interests are riding in the sidecare and the driver has lost control.
My understanding is that 401k (and IRA) contributions are including in the saving rate.
Oops, that should be "included".
And now I see that Steve and rich already addressed this. Sorry about the repeat.
The problem with 401ks and the savings rate is that when you make withdrawals the money isn't counted as income. HOWEVER, when you spend it, yep, it gets counted as consumption.
Thanks, Steve, for correcting my mistake.
Learn something new here every day.
Smart folks here.
Get this: In Vancouver, Canada a full 77% of your income goes to your house (excluding taxes and insurance). Apparently this is the most non-affordable housing of any Canadain city.
Ouch!
Maybe I'm being dense right now, but could you remind me what the FC rate is.
Won't the new BK laws keep a lot of people from erasing their debts if they have income. Doesn't the debt transfer to the Gov.(IRS?)?
I'm assuming that debt owed to the IRS doesn't show up in these numbers, is that correct? Won't that be increasing anyway for people with assets that are writing off mortgage losses.
Matt | 09.19.07 - 2:26 pm | #
FC is foreclosure. Why people feel the need to abbreviate a single word is beyond me.
The debt doesn't transfer directly to the government. If a foreclosure generates a writedown debt forgiveness, I would expect that to be taxed only as normal income - at 10-35% based on tax bracket.
Similarly much ado is made of the claim that the average American has $N,000 in credit card debt. This is not necessarily bad, as credit card arbitrage has been a major cottage industry in recent years. (find a credit card with a "no interest until September 2008" structure. Get a cash advance. (often at a nominal %50 fee) Take out a 12 month CD for 4.5%. Make $450 risk free.)
USA #1 u commie-pinkos!