by Bill McBride on 12/14/2011 01:40:00 PM
Wednesday, December 14, 2011
Fed: Household Debt Service Ratio back to 1994 levels, Mortgage financial obligations remain elevated
The Federal Reserve released the Q3 2011 Household Debt Service and Financial Obligations Ratios yesterday. (ht Bob_in_MA) I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.
These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.
The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:
The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.
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
The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.Click on graph for larger image.
The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt.
The overall Debt Service Ratio has declined back to 1994 levels - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is also at 1994 levels.
However the homeowner's financial obligation ratio for mortgages (blue) is still high and will probably continue to decline. This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to 2003 levels.