How distressed are families with their debt service and financial obligations as the free-money Feds miracle?

It looks like households have plenty of fuel left to throw at inflation, if they’re in the mood.

By wolf richter for wolf street,

What is the burden on households to meet their loan and other financial obligations in terms of their disposable income? This is perhaps the most important debt measure, and the question we’re going to tackle in a moment.

The pandemic-era policies flushed households with money, allowed them to catch up with past dues, and allowed them to move outstanding loans into forbearance. He had free money because of non-payment of mortgage, student loans and rent. Then there were the PPP loans, more than $800 billion of them. Crime rates, foreclosure rates, third-party collections, and bankruptcies all fell to record lows. As a result, credit scores improved across the board. This was topped by blistering asset price inflation across stocks, bonds, real estate, crypto, etc., but all of this is now subsiding more or less rapidly.

Auto loan delinquencies rose for the third consecutive quarter in Q3, but are still lower than at any time before the pandemic, Consumer bankruptcies remained near a record low in the third quarter; Foreclosures, after holding up for two quarters, fell again in the third quarter; And the number of consumers with third-party collections fell to a record low in the third quarter (I discussed it in detail here,

Credit cards are increasingly being used as a universal payment method, and credit card “debt” includes balances that are repaid each month and do not earn interest. So a credit card balance is more a measure of transactions than a loan. And despite an increase in spending on travel this year, almost all of which is purchased via credit card, balances only went back to where they were three years ago (which I discussed in detail here,

So how much of a burden is this debt for families?

First a warning. We’ll get into proportion in a moment. These are estimates by the Federal Reserve based on aggregated data of all types. The absolute proportions are not important, and whether or not they are “realistic” or whatever for a particular house is not that important.

What is important is how the ratios move over time, whether they rise or fall, and where there were breaking points where households began to buckle under their debts – for example with the financial crisis coupled with the employment crisis and mortgages. during the crisis.

household financial obligation ratio (FOR) tracks total financial obligations as a percentage of disposable income. These financial obligations are the broadest measure of burden and include not only payments on mortgages, credit cards, auto loans and leases, but also rent payments, homeowner’s insurance and property tax payments.

For revolving debt, such as credit cards, the Fed uses an estimate of the required minimum payment rather than the total balance because borrowers are only obligated to make minimum payments.

The proportion of these financial obligations reached 14.5% of disposable income in the third quarter, according to data released today from the Federal Reserve. Disposable income is income from all sources, from which payroll deductions are subtracted.

During the peak stimulus in Q1 2021, the financial obligation ratio fell to a record low of 12.6%. In the third quarter of 2007, on the eve of the financial crisis, it reached 18%. Today’s readings, while above pandemic lows, are still below any pre-pandemic lows.

In other words, households are much less burdened with financial obligations in terms of their income than at any time until the 1980s, and are therefore less likely to run into the kind of trouble they face during a financial crisis, unless: Like jobs are stopping.

Jobs.., If there is an unemployment crisis, as was the case during the financial crisis, the disposable income of millions of people falls to the level of unemployment benefits, and the burden of loan payments becomes insurmountable for many families. But it’s still the weirdest job market out there, and a very hot job market, with rising salaries. Laid off employees are still quickly absorbed by other employers., And so far, so good.

household debt service ratio (DSR) is narrower than FOR and tracks only payments on mortgage and consumer debt (payments on auto loans and minimum required payments on revolving credit, such as credit cards and personal loans) as a percentage of disposable income.

In Q3, DSR ticked up to 9.8%, matching the previous record low in 2019. On the eve of the financial crisis, from Q3 2007 to Q1 2008, the ratio had risen to over 13%:

mortgage debt service ratio Tracks mortgage payments as a percentage of disposable income. Roughly one-third of homeowners do not have a mortgage. Another large group of homeowners bought their homes several years ago at very low prices and have relatively low mortgage payments. It has always been like this.

We’ve had a huge increase in home prices in recent years, and therefore a big increase in the size of new mortgages, and now mortgage interest rates. the people who recently People who have bought and financed their own home bear a much higher burden than those who bought it a long time ago.

But wait… In mid-2020, the mortgage forbearance program began when participating families suddenly had no mortgage payments until they exited the program. And this sudden disappearance of mortgage payments due to forbearance caused mortgage DSRs to fall from record lows already in 2019. And now, homeowners have mostly opted out of those programs, and mortgage DSRs are returning to normal.

Mortgage DSR increased to 4.0% of disposable income, which is still lower than at any time before the pandemic:

consumer debt service ratio Tracks the minimum required payments of revolving credit, such as credit cards and personal loans, with non-revolving forms of consumer credit, such as auto loans.

That ratio rose to 5.8%, close to where it was in 2019, and somewhere in the middle of the historical range, thanks to huge price increases for new and used vehicles as auto loan balances. In addition to that jump in prices in 2020 and 2021, there are also higher interest rates this year.

So what we’re seeing here is that the overall financial obligation ratio and debt service ratio are normalizing to historically low levels, despite some pressure from vehicle loans, after the tightest period ever.

In other words, even with rapidly rising incomes, households have plenty of room left over, which allows them to take on a higher debt load if they so choose. They’re far from being “tapped out”, but they have plenty of fuel left to throw at inflation if they’re in the mood.

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