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Household Debt Rising, but Payments Remain Under Control

Household Debt Rising, but Payments Remain Under Control

February 02, 2021
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The surge in global debt has been a hot-button issue, so this week LPL Research will focus on the various segments of global debt, beginning “Debt Week” with Weekly Market Commentary: Markets Shrug Off Debt Levels.

The US household has certainly been through a lot in the 21st century, including a housing crisis in 2008 and now a global pandemic that has triggered one of the deepest recessions ever and caused double-digit unemployment at one point—the highest in the post-WWII era.

Despite these hardships, the ability of the average US household to meet its debt payments has steadily improved. As shown in the LPL Chart of the Day, after deteriorating throughout much of the 1990s up to the 2008 recession, household debt service payments as a percent of disposable income (i.e. after tax) have improved dramatically in the most recent decade.

View enlarged chart.

The steep drop in mortgage debt payments primarily drove the aggregate improvement in the household debt burden (blue line), as mortgage rates have fallen to all-time lows since the 2008 recession. However, the 2008 housing crisis has had a lasting impact on homeownership, which may also play into this trend. According to the 2019 Federal Reserve Survey of Consumer Finance, the homeownership rate remains well below the peak observed in 2004.

While there has been marked improvement in mortgage debt service payments, the consumer debt segment of household debt (yellow line), which includes credit cards and student loans, has actually crept higher in recent years. As student loan debt nearly doubled to $1.7 trillion in this period, students were unable to share the same trend in interest rates that benefitted other borrowers, according to the Department of Education. The surge in outstanding student loans may also weigh on the long-term growth prospects of the US economy, as student debt payments may reduce access to additional credit and can crowd out consumption or investment opportunities, either directly or indirectly through reduced access to credit.

Understanding the importance of protecting household finances during the pandemic, unprecedented levels of fiscal stimulus have been implemented, including enhanced unemployment insurance, direct payments to households, and student loan forbearance. These policies have triggered the additional dip in household debt burdens in 2020, despite unemployment reaching as high as 14.7% in 2020. “It may seem hard to believe, but the average household may be better off after 2020, but personal income rates have risen and debt service payments as a percent of disposable income have declined,” added LPL Chief Market Strategist Ryan Detrick.

Despite the improvement of the American family’s ability to service debt payments, unemployment remains at a persistently high 6.7%. With the Federal Reserve keeping interest rates at the zero-bound and pledging their continued support for the economy, the risk of a dramatic increase in interest rates causing a deterioration in debt burdens seems low for the near future.

 

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