The Federal Reserve Bank of New York recently reported that aggregate household debt outstanding was $11.31 trillion on a not seasonally adjusted basis in the third quarter of 2012, $74.00 billion less than the amount outstanding in the second quarter of 2012. In the third quarter of 2012, outstanding debt secured by real estate fell by $135.00 billion from the second quarter. Outstanding debt secured by real estate is largely composed of mortgages, but also includes home equity lines of credit. However, the decline in outstanding debt secured by real estate was partly offset by the $61.00 billion increase in consumer debt outstanding. The decline in aggregate household debt outstanding in the third quarter of 2012 continues the multi-year trend of falling debt outstanding. Since peaking at $12.68 trillion in the third quarter of 2008, the total amount of household debt outstanding has fallen by 10.77%.
As the chart below illustrates, the rise and decline in total debt outstanding over the previous ten years reflects changes in outstanding debt secured by real estate. However, outstanding debt secured by real estate as a share of total debt outstanding has fallen slightly as declining real estate secured debt is offset by rising consumer debt outstanding. Between the first quarter of 2003 and the third quarter of 2008, total debt outstanding grew by $5.44 trillion. Over this same period real estate secured debt outstanding grew by $4.80 trillion while consumer debt outstanding expanded by $0.64 trillion. Meanwhile, the $1.37 trillion decline in total household debt outstanding since the third quarter of 2008 reflects the $1.39 trillion decline in real estate secured debt during the same period. However, consumer debt outstanding grew modestly, rising by $20.00 billion over the past four years.
In addition to falling levels of household debt, disposable personal income has risen. As a result, the household debt ratio, the share of debt payments to disposable personal income has declined dramatically. The household debt ratio conveys the ability of households to meet their debt obligations. As the chart below illustrates, the ratio of household debt rose slightly during the housing boom. Between the first quarter of 2003 and the third quarter of 2007, the household debt ratio rose by 0.92 percentage point to 14.05%. Although disposable personal income grew, which should lower the household debt ratio, total household debt outstanding rose even faster. Over this period disposable personal income rose by 27.94% but aggregate household debt outstanding expanded by 67.78%. Between the second quarter of 2008 and the first quarter of 2009, the household debt ratio experienced a slight rebound. This uptick reflects a decline in disposable personal income. The 4.39% decrease in personal income exceeded the 0.55% decline in aggregate household debt outstanding.
After peaking in the third quarter of 2007, the aggregate household debt ratio has since fallen by 3.36 percentage points to 10.69%. The decline in the household debt ratio reflects both a decrease in total household debt outstanding and an increase in disposable personal income. Since the first quarter of 2009, aggregate debt outstanding according to data compiled by the Federal Reserve Bank of New York, contracted by 9.73%. Over this same period, disposable personal income increased by 11.51%. The decline in the household debt ratio resulting from both a smaller level of debt outstanding and more disposable personal income suggests that household balance sheets are strengthening and their ability to service their debt is improving.
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The question is, how much of the reduction in real estate debt is due to foreclosures and short sales and how much is attributable to mortgagors actually paying down mortgage balances. Based on the level of distressed inventory, my guess is that it is the former rather than the latter. If this is the case, any improvement in the move-up market is still a long way down the road.
[...] has been a good year for home building. Home prices are showing gains and household balance sheets continue to improve. Those developments have spurred increases in home sales and home [...]
[...] third quarter, household balance sheets moved forward with increases in household net worth, declines in debt, and a small drop in the personal savings rate. These are favorable improvements that will help [...]