US household debt burden hits record low, a positive spending sign

Posted on: April 22nd, 2013 by faisal No Comments

Brought to you by: Reuters.com

– A measure of the burden of U.S. household debt sank to a record low in the fourth quarter, offering more evidence of improving household finances that should lend support to consumer spending and the economy.

The household debt-service ratio – an estimate of the share of debt payments to disposable personal income – fell to 10.38 percent, the Federal Reserve said on Wednesday.

That was the lowest since the series started in 1980. In comparison, the ratio, which takes into account outstanding mortgage and consumer debt, was 10.56 percent in the third quarter. It peaked in the third quarter of 2007, shortly before the U.S. economy fell into recession.

“Household balance sheets are improving and that lays the foundation for more spending, which in turn can lead to a virtuous cycle of more business investment and hopefully more jobs,” said Dana Saporta, director of U.S. economics research at Credit Suisse in New York.

U.S. households built up a massive debt load as the housing bubble expanded. Efforts to pay down those debts have been a restraint on spending and the economy’s recovery.

Now, it appears that process of deleveraging may have run its course.

Data from the Fed last week showed household debt rose at a 2.5 percent annual rate in the fourth quarter, the fastest since early 2008, while a report last month from the New York Federal Reserve Bank said consumer debt rose in the last three months of 2012 for the first time in four years.

A HELPING HAND FROM THE FED

Near record low interest rates as the U.S. central bank tries to foster faster economic growth are helping households to reduce their debt, which should free them to take on more debt or spend more freely.

The Fed has held overnight rates near zero since December 2008. It has bought around $2.5 trillion in bonds to further lower borrowing costs.

Still, economists do not expect household borrowing to surge just yet.

They also cautioned that the data could be overstating the improvement in household balance sheets, noting that the report did not make a distinction between those who are paying off their debt and those who have lost access to credit after losing their homes to foreclosure, among other factors.

“We also need to be aware that a lot of the borrowing we have been seeing in recent months has been student loans, which is different than if people were borrowing to improve their homes,” Saporta said.

An even broader measure of financial obligations that includes automobile lease payments and the cost of renting a home also fell in the fourth quarter, dropping to 15.48 percent of disposable income – the lowest level since the third quarter of 1981.

That drop reflected an easier burden for homeowners as mortgage debt payments dropped to 8.67 percent of disposable income in the fourth quarter, the lowest in nearly 13 years.

Both the overall homeowners measure and separate mortgage gauge peaked in the third quarter of 2007.

In contrast, the relative cost of rent rose to its highest level since the fourth quarter of 2009.

The weak housing market has led Americans away from home ownership and toward renting, pushing up rents. At the same time, a modest economic recovery has encouraged some people who had moved in with family and friends to seek their own lodgings, further strengthening the rental market.

By Lucia Mutikani


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