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How Strung-Out Are Households with their Debt Service & Financial … – WOLF STREET

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What is the burden on households from servicing their debts and other financial obligations, in terms of their disposable income? That’s perhaps the most important debt measure, and the question we’re going to grapple with in a moment.
The pandemic-era policies left households flush with money, allowed them to catch up with past-dues, and allowed them to move delinquent debt into forbearance. They had free money by not having to make payments on mortgages, student loans, and rent. Then there were the PPP loans, over $800 billion of them. Delinquency rates, foreclosure rates, third-party collections, and bankruptcies all dropped to record lows. As a result, credit scores improved across the board. This was topped off by the blistering asset price inflation in stocks, bonds, real estate, cryptos, etc. But all of this is now getting more or less rapidly unwound.
Auto loan delinquencies in Q3 rose for the third quarter in a row, but are still lower than any time before the pandemic. Consumer bankruptcies remain near record lows in Q3; foreclosures, after ticking up for two quarters, fell again in Q3; and the number of consumers with third-party collections fell to a record low in Q3 (I discussed this in detail here).
Credit cards are being used as a universal payment method, and credit card “debt” includes balances that get paid off every month and never accrue interest. So credit card balances are more of a measure of transactions than of debt. And despite the surge in spending on travels this year, nearly all of which is purchased via credit cards, balances only went back to where they’d been three years ago (which I discussed in detail here).
First a caveat. We’ll get into ratios in a moment. These are estimates by the Federal Reserve based on all kinds of aggregate data. The absolute ratios are not important, and whether or not they’re “realistic” or whatever for a particular household is not important either.
What is important is how the ratios move over time, whether they rise or fall, and where the breaking points were at which households started to buckle under their debts – for example during the employment crisis and mortgage crisis that accompanied the Financial Crisis.
The household Financial Obligation Ratio (FOR) tracks total financial obligations as a percent 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, etc., but also rent payments, homeowners’ insurance, and property tax payments.
For revolving debt, such as credit cards, the Fed uses an estimate of the required minimum payments, rather than total balances because borrowers are only obligated to make that minimum payment.
The ratio of these financial obligations ticked up to 14.5% of disposable income in Q3, according to the Federal Reserve’s data released today. Disposable income is income from all sources minus payroll deductions.
US household debt service ratios 2022 12 22 financial obligation
During peak stimulus in Q1 2021, the Financial Obligation Ratio dropped to a record low of 12.6%. On the eve of the Financial Crisis, in Q3 2007, it hit 18%. Today’s reading, while up from the pandemic lows, is still below any pre-pandemic lows.
In other words, households are far less burdened by financial obligations, in terms of their income, than at any time going back to 1980, and are therefore less likely to get into the kind of trouble they got into during the Financial Crisis, as long as jobs are holding up.
Jobs... If there is an unemployment crisis, as there was during the Financial Crisis, the disposable income of millions of people plunges to the level of unemployment benefits, and the burden of debt payments becomes insurmountable for many households. But this is still the weirdest job market ever, and a very hot job market, with surging pay, where laid-off workers are still quickly absorbed by other employers. And so far, so good.
The household Debt Service Ratio (DSR) is narrower than the FOR and only tracks payments on mortgages and consumer loans (payments on auto loans and minimum required payments on revolving credit, such as credit cards and personal loans) as a percent of disposable income.
In Q3, the DSR ticked up to 9.8%, matching the previous record lows in 2019. On the eve of the Financial Crisis, in Q3 2007 through Q1 2008, the ratio had exceeded 13%:
US household debt service ratios 2022 12 22 debt service total
The Mortgage Debt Service Ratio tracks mortgage payments as percent of disposable income. Roughly one-third of homeowners don’t have a mortgage. Another big bunch of homeowners bought their home many years ago at much lower prices and have relatively low mortgage payments. That has always been the case.
What we have had in recent years is a huge spike in home prices, and so a big increase in the size of new mortgages, and now the spike in mortgage interest rates. People who recently bought their home and financed it carry a much higher burden than those who’d bought it a long time ago.
But wait… In mid-2020, the mortgage forbearance programs started, when participating households suddenly had no mortgage payments until they exited the program. And this sudden disappearance of mortgage payments due to forbearance caused the mortgage DSR to plunge from already record lows in 2019. And now, homeowners have mostly exited those programs, and the mortgage DSR is getting back to normal.
The mortgage DSR rose to 4.0% of disposable income, which is still lower than any time before the pandemic:
US household debt service ratios 2022 12 22 mortgages
The Consumer Debt Service Ratio tracks the minimum required payments of revolving credit, such as credit cards and personal loans, along with the non-revolving forms of consumer credit, such as auto loans.
The ratio rose to 5.8%, just a hair above where it had been in 2019, and somewhere in the middle of the historic range, amid ballooning auto loan balances due to massive price increases of new and used vehicles. In addition to that spike in prices in 2020 and 2021, there are the higher interest rates that have phased in this year.
US household debt service ratios 2022 12 22 consumer
So what we’re seeing here is that the overall Financial Obligations Ratio and the Debt Service Ratio are normalizing at historically low levels, despite some pressures from vehicle loans, following the craziest period ever.
In other words, households have lots of room left, along with rapidly growing incomes, that allow them to carry higher debt loads if they so choose. They’re far from being “tapped out,” but instead have lots of fuel left to throw on inflation, if they’re in the mood.
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Encouraging news but with all the manipulation (economic and psychological) I am not willing to take this as predictive. People act and react largely as they’re instructed to do. Let’s do this again in 3-6 months and see what changes.
I’m going to do this quarterly from now on so that we’ll see where this is going.
My bet is that the change will be brought by layoffs only. These will be forced by investors as revenues and profits will drop significantly. Why I believe this will happen is because of quality of our business leaders, who are still expanding in face of inevitable slowdown, believing in a Fed Pivot fantasy.
These corporations are ill-prepared to take on the economic challenges, so end result will be very painful. E.g. Auto companies expanding their sales and monitoring departments while cutting back on manufacturing as unit sales decrease while price per unit inflates significantly.
Typo: Sales and monitoring departments => sales and marketing departments
VP of “Sales and monitoring”? Epic!!
Look for the pink slips to start flying during or after the next big down leg in stocks. The decline hasn’t bene large enough for the average in aggregate.
It’s been covered on this site but limited so far.
Unemployment is still very low 3.7% and corporations have record profits.
Layoffs won’t be happening like in 2008.
Apple, that’s what they said in 2007, and it was true then as well. But we still got a crash in 2008.
The only way to win is to not play the game.
Give it some time when money gets tight the debt load increases and anyone who has been riding on bold tires will be on the side of the road SOL.
…Damon-brand crypto-coin wheels ‘n tires???…
may we all find a better day.
Wolf…
Have you shown a chart of the wealth locked up in those who are on the property ladder at one level or another?
Think of the Spectrum…
One person bought their first home 25 years ago, and added over the years.. lets say they own a spread of properties.. 10 or more..
Purchased in the intervening years..
The next might be someone who has owned and upgraded the size of the Family home over 20 years…
Lets move to the other end…
This person suffered demented FOMO and purchased at very very high leverage..
Their First home… right at the peak…
Then you have the Renter Class…
Each of these large groups of people, are living in entirely different
Economic worlds…
Some of these groups are sitting on a lot of Wealth and Credit..
They are very insulated from any downturn…
come on
I like making my 15% + 2 points on flipper loans
Have you seen a drop in demand for your loans?
Let me guess, you’re one of the “soon to be sunk” Private Money Lenders who’s still lending on flips at 90% of purchase and 100% of repairs? Lol. I’m watching these types of guys getting ready to eat some serious shit, some already are. Can’t wait until they all sink, and sink hard. Everyone is a genius when the market is going up!
Wolf just delivered a load of Christmas coal to the FED pivot crowd.
And everyone is running around with their hair on fire claiming the economy is in free fall because of the fed. What a joke!
Yes, it’s funny how wishful thinking on Wall Street is now twisted into wishing for an economic catastrophe.
Exactly. Everyone is talking their book. I’m noticing how gold/silver bugs are upset because their “hedge against inflation” will be hurt if the fed crushes inflation and continues QT.
How do you reconcile this with the potential of a housing crash? Looks like we have reached a permanently high plateau here , for those hoping to buy 50% lower.
Yeah, that’s the thing with Wall Street: they want the economy to tank so that the Fed will cut rates and start QE or whatever, to push up asset prices. But right now the Fed is doing the opposite and asset prices are tanking.
The Google says combined debt of USA (gov + corp + consumer) is 7.7 × GDP. That’s pretty darn high. Powell is going to find out exactly what real rate will roll the economy over.
Not too sure what to make of this, sounds like a lot of resilience in the system good for company earnings et al, but not what the Fed would want to see. makes it a longer and harder job for them, probably means the US economy can take a bit more hammer. As Wellington said at Waterloo “this is will take careful timing”.
Reading the WSJ daily I haven’t seen any talk of companies hiring left and right lately. It is talk of layoffs left and right instead. Rather than the unemployment rate (that doesn’t count those unemployed and not looking for a job) I would rather see the percentage of the workforce employed for a more realistic view of employment in the US of A.
The problem is the workforce, and everyone knows it’s the problem. Several million people have refused to rejoin it. There are a bunch of fairly well-documented reasons for that, the biggest being “excess retirements,” meaning a lot more people retired than would normally have been the case. This also involves rampant ageism that seems to be worse than before.
Labor shortages are still all over the news: NPR just had a big thing about hotel staff shortages. The other day, there was a big thing about teacher shortages. Healthcare workers have gone on strike to protest staff shortages… this stuff is ALL OVER the news. If you didn’t see it, it’s because you don’t want to see it.
Walmart, Kroger, and the liquor distributor parking lots all packed to capacity yesterday. Self check out lines stretched to back of store. 4 man crew of young entrepreneurs out in neighborhood at noon today -18 degrees offering snow shoveling services for $40 per home. Wolf article makes perfect sense. Denver giving out $1,000 month to homeless and we have about 1500 new migrant arrivals. “People have habits, people have plans that they don’t change. “
Almost as though there were a major holiday coming up in the next few days.
Can everyday prices really go down? In my area during and after the GFC I was looking for a huge reduction in things like building products, home improvements, paver driveways, construction labor. What I found was things slowed down to a point many contractors and other businesses closed. For a while the remaining businesses were charging MORE to make up for the loss in volume. I tried to negotiate lower bids but they were not having any of that. As the crash slowed and was on the way to recovery pricing just seamed to stay at about what it was pre crash, no big decline? Is it wise to expect labor and materials to drop significantly with this coming crash or will the consumer be still healthy enough to afford the new pricing thus establishing the new normal. I must be crazy to think we will ever have any meaningful deflation in everyday stuff, only assets like stocks and real-estate taking the hit?
Can you expand on this “coming crash” you’re talking about?
We look like we have entered the anticipated housing correction-crash. It could be better or worse than 2008. Some say the homeowner is in a much better position than in 08 but any market that is over heated will correct to some degree.
Cool, looks like these numbers give Papa Powell all the ammos he need to keep hiking and may I suggest hike bigger and faster? Obviously American consumers still have plenty of money left, that QT mop isn’t soaking up all the loose money that well…time for the FED to upgrade it to the Shamwow instead if he wants to get to 2% target sometime this decade…
I wonder if this includes installment payments for purchases. For example, my Amazon card keeps offering to let me make six payments for purchases, instead of paying now. Other such debts are reportedly not listed in usual credit card debt measures.
Of course, Americans are not yet starving. However, remember that we can expect inflation to go on for years: it is too lucrative to the banksters and financiers (and their fellows and cronies, the other wealthiest 1%), because it reduces the real value of their customers-depositors’ bank deposits, wages of their employees, bondholders’ outstanding bonds held, etc., as the dollar’s value is reduced via inflation–WORLDWIDE.
Remember that: inflation is a benefit for the ultrarich WORLDWIDE to the extent they use the US dollar because through it their liabilities/expenses are reduced while they can pass on any real price increases actually suffered by their companies, gigantic farms in third-world countries, mines, banks, etc., to their consumers.
Your Amazon card debt is included in the green line, and it’s included in “consumer credit” numbers above.
US consumer credit 2022 11 15 Credit card other balances
If he keeps turning the screws he is going to get the job done. It all works with a delay. The swindlers are starting to go belly up. Next in line will be those using margin.
He probably could stop at 4% and wait a couple of years and it might be enough as the rates bite, but he knows he can’t risk inflation getting out of control and have a good legacy.
If he wanted to be a tough guy, he should call a special meeting next week and raise rates another 3/4% to punch Congress in the nose about spending. In the big scheme of things waiting til next meeting will not matter much. He will just have to keep going a little longer than planned.
I suspect a lot of pain to new and old homeowners will be property tax hikes. Granted, its not a one size fits all, I highly doubt any local state government will skip out on their “fair” share of housing bubble.
In Chicago alone, people are dumbfounded, when they learn about their new reassessed taxes going anywhere 30%-50% higher.
Old homeowners get screwed, because they get reassessed based on comparable properties that are overpriced, new owners seem like they don’t care about property taxes. I remember stopping by townhome hosting open house earlier this year. Despite property taxes being $10,000 – it sold within a day…
“Old homeowners get screwed, because they get reassessed based on comparable properties that are overpriced”
Not in California.
Gotta love Prop 13..NIBYism at its best
The data segmented by wealth distribution, income distribution, or a combination of both would be a lot more revealing.
(Yes, you’ve told me more affluent people have the bigger debts. I know that but the .01%, .1% and 1% who account for a disproportionate percent of total income usually have assets far above their debts. Remove them from the calculation and I’m confident the numbers increase considerably. Same idea for lower or slightly lower percentiles in the distribution.
As an example, years ago, I read that Larry Ellison of ORCL had a $2B personal loan, probably secured by his company stock. Since the article didn’t explain, I infer he did this to avoid paying capital gains taxes while potentially finding a way to write off the relatively modest interest expense for him given his net worth.)
THIS IS ABOUT WEALTH DISTRIBUTION.
Income distribution is an entirely different data set that is not compatible.
ONE TOPIC AT A TIME.
Assets and debts are detailed for the 0.1%, the next 40%, and the bottom 50%. All you have to do is read the article.
I know you said not to worry about the actual percentage, but what about what they are measuring? I must say that as someone with no debt, my rent “debt, rent, mortgage, property tax, homeowner’s insurance” is a very, very small portion of my monthly budget.
However, my childcare costs have gone up 15% since last year and every daycare has a waiting list. Right now we pay 2.5x more for our childcare, than for ALL household services and costs, including the HFOR. We have two under 5’s.
So sure, we have plenty of money leftover each month according to this metric, but only if we ignore the real world. I appreciate the point the article is making, and agree that we’re going to be fine so long as we all stay employed, but there isn’t much fat to trim in our budget and I don’t think we are too unusual in the crowd that has kids.
How everyone is going to stay employed is certainly something to ponder . With all the Cash still sloshing around and the Perhaps Mass layoffs coming ( possibly ) or Lesser but continued Layoffs both having similar effects . The fight is a many edged sword with the Inflation world on one side and the Pre Inflation world on the other, humm before and after.
Without the present induced economy just think we would not Have Hi Home Prices and Rental Costs or the Inflation like it is effecting everything . Many are Happy like Powell and Trump who In Cut Rates basically to make $$$ ( Not ours )
The Leftovers now are at hand 5% CD’s are available and Hi mortgage Rates as example, soon turning to to be Loss of Equity . Whats the light at the end of the Tunnel ? cheap foreclosed properties , New Government work programs ?
Inflation in services will not decline in meaningful way due to a shortage of workers and workers attempting to keep up an ongoing inflation. It will take a very high unemployment rate to bring wage inflation down. I just do not see that given the shortage of workers for most jobs.
100% agree in healthcare the shortages are incredible throughout the spectrum of medical assistants all the way up to surgeons. Everyone of them that has been around and made it through Covid stress either 1) jumped jobs for big pay increase 2) retired due to burnout and some level of financial stability due to asset appreciation ( Jan 22 timepoint). 3) quietly quit demanding salary increase from current employer of no less than 15-20%. Healthcare system’s fighting hard to keep and get employees. Private practices pretty much dead.
It’s strange out there as far as what people can and can’t afford. How stable is their job? Do they have a family to cover? Do they have a chronic health need? A family that can gamble and skip health insurance costs for a year or more has much higher spending power than one that can’t. Our health insurance costs for 2023 just came in at work. Employer covers half but $590 for one person per month and $1,972 for a family per month. A person who is Medicare age with a paid off house or a mortgage from a decade+ ago has more spending power. Someone in their 40’s with asthma or dependent on insulin who bought a house in the last 5 years could have a very rough time. Who can spend in the face of this inflation seems dependent on what sort of economic pocket they occupy. Some folks are doing ok and some are in a pretty bleak position. The part that is hard is it seems more dependent on age, health, gov’t subsidy or timing of asset purchases which are factors that are often only partially under any individual’s control. There seems to be too much manipulation of the knobs and levers of the overall economy to have any sort of level playing field and the rules keep getting changed. It seems like there is an effect like a rolling blackout except it is a rolling economic blackout that hits certain groups at different times and does serious damage to their wealth and prospects. The government subsidies act as aid or relief to these groups after they are hit but the entire thing seems pretty unstable as well as unsustainable.
1) If household debt service is so low why people are so depressed.
2) If income is much higher than debt service retained earnings should be in the trillions.
3) People are depressed because their financial superstars – AAPL, AMZN,
MSFT, GOOGL – are injured, down 38% since Nov 2021, hugging the lows for eight months, since May. The bond market massacre is shocking and now real estate failed to perform.
4) People are depressed, but VIX don’t care.
5) For some people marriage and employment are form of slavery. Offer them whatever, they don’t care. They are out of work since LBJ.
Sorry Sir,
why would we?
What is the burden on households from servicing their debts and other financial obligations, in terms of their disposable income?
I grapple this from being amused by the simplicity yet also sorrow.
I don’t want to toot the pike kids horns but it’s been a long time a coming.
-shandy
Gold & silver might be the winning asset for the next decade. Real Assets will outperform Financial Assets. The debt ceiling is up by $1.7T, up 5.6%, mostly for defense. New $10,000 stimulus checks are coming to the gold diggers.
Hey Wolf,
Love your content and am thankful for it.
$1.8 Trillion omnibus passed tonight.
I may not know enough about inflation. But do you think Powell grunts when things like that are passed, and in turn factors it in with the rate setting …?
I feel like congress has made themselves immune to inflation and it’s kind of scary.
In the UK at least the pound reacted to unfunded debt. But the US just keeps the faucet open.
Thoughts I’m just very confused?
You’re not confused at all :-]
1) Oil is old. Use it as long as it last. The glut is gone, only shortages.
2) Europe imported more LNG than ever. China replaced coal with US LNG. India was first to import LNG from US. India signed a new $2.5B LNG import from US.
3) Japan demand for LNG will grow by 50% in the next decade.
4) Norway became a wholesaler for US LNG.
5) Demand for US weapons and energy is growing. King dollar rule.
6) China have 14 land border neighbors. They flare a regional war with each of them, one at a time, risk free, to cover their own domestic problems.
7) China must have an enemy. Without one they die. They like it so much they asked for more : Japan, Taiwan, S. Korea, South China Sea, their pearl necklace, the Silk Road and Gwadar Baluchistan. The people of Baluchistan ordered 500 Chinese in Gwadar to leave at once, this weekend. That’s first.
8) The Eagle hunt a Rabbit down below.
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Consensual-hallucination stocks and crypto just keep on giving.

The seller-buyer standoff.

The vast wealth of the top 1% households declined, the minuscule “wealth” of the bottom 50% increased a tad.

Yen and 10-year yield spiked. BOJ cited bond market dysfunction, didn’t mention elephants in room: raging inflation & yen’s plunge.

In California overall, prices dropped year-over-year, as sales collapsed, supply more than doubled. No dear, this isn’t just a seasonal dip.

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