The Beginning Of A Sea Change In Household Deleveraging

by: Hale Stewart

By New Deal Democrat

The Federal Reserve's report on household debt burdens was released earlier this week, covering the January to March quarter. I have been watching this series since before the Great Recession. Indeed, when household debt burdens started to decline, that was one of the final signs that the Recession was about to start. Furthermore, I long suspected that before this cycle was over, households would set new all-time lows for debt service. With the exception of one quarter in 1980 (as to total financial obligations), that happened in the final quarter of last year.

First, a refresher. According to the Federal Reserve:

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.

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.

I've combined the two measures into a single graph. Total financial obligations are in blue and debt service payments are in red:

Click to enlarge

I have noted a number of times that refinancing increased in 2011 and 2012 with new record lows in mortgage rates, and probably played a major role in keeping the economy from tipping back into recession. Now, for the first time in four years, household deleveraging has stopped. Whether we have already hit the absolute bottom or not is impossible to say, but it certainly appears as if the bottoming process has begun.

It's also worth noting that the willingness of households to re-leverage, even slightly, bespeaks increasing confidence about the future. Recall that this has also shown up in recent consumer confidence readings, which have made five-year highs, and in Gallup's consumer spending data, which has been strong ever since last December, even in the face of the payroll tax increase. This is also of a piece with the new post-recession lows in the savings rate.

I believe this is the beginning of a very slow sea change.