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Households’ lightening debt load

Data on the financial burden of U.S. households

There are many types of debt, including household debt, and many specific types of household debt as well. The Board of Governors of the Federal Reserve System collects a wide and well-organized array of data on debt. These data, especially in graph form, can help us better understand the financial burdens of U.S. households.

This FRED graph shows the percentage of disposable (i.e., after-tax) income that households dedicate to servicing specific types of debt. The graph has four lines. Let’s start at the bottom: The green line shows mortgage debt, and the red line shows consumer debt (credit card, auto, and personal loans). The blue line is the sum of the red and green lines. And the purple line adds to the blue line some other financial commitments, such as rent, auto leases, homeowners’ insurance, and property taxes.

What can we learn from this FRED graph?

The two top lines are almost always parallel to each other, which means that the contribution of those “other financial commitments” doesn’t really change much over time.

The financial burdens from mortgages and consumer debt vary quite a bit. Let’s consider two reasons for this: The larger the debt, the larger the burden, as households need to pay more interest on a larger principal. And changes in interest rates obviously influence how much is paid to service loans. The blue line (mortgage debt plus consumer debt) increased from the early 1990s until the past recession, when it decreased. This decrease is the result of the combination of the two effects noted above: the amount of debt and interest rates. With one exception (in the fourth quarter of 2012), total debt obligations are at the lowest they’ve been since these data were first collected. And this is especially true of mortgage debt.

How this graph was created: Start from the Household Debt Service and Financial Obligations Ratios release table, select the desired series, and click “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CDSP, FODSP, MDSP, TDSP

On household debt

Some people are worried about high levels of U.S. household debt. When looking at aggregate numbers, there are two ways to consider this question. The first is how much it costs to service this debt as a fraction of disposable (after tax) income. This is shown with the blue line. The second is how much debt there is with respect to the same disposable income measure. This is shown with the red line. Whether these numbers are high is difficult to say; household-level data are more appropriate for that question. But in the aggregate, both measures have clearly decreased during the past crisis. Note the scale, though: While service payments decreased by almost one-third, the debt ratio decreased by only one-fifth. And whenever interest rates go back up, service payments will increase.

How this graph was created: Creating the blue line is easy: Search for “household debt” and select the series for debt service as percent of disposable personal income. The red line is more complex because it has to be constructed: We need the two components of household debt (consumer credit and mortgages) as well as nominal disposable income—nominal, not the real or per capita versions, because the debt measures are in nominal terms. So, from within the graph, search for “household consumer debt” and add this series (a) to the graph. We must combine more data here, so add “household mortgage debt” (b) and “disposable income” (c), being sure to select “modify series 2.” Then create your own data transformation by applying the formula (a+b)/c. Finally, switch the y-axis position to the right.

Suggested by Christian Zimmermann

View on FRED, series used in this post: DPI, HCCSDODNS, HHMSDODNS, TDSP

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