The Federal Reserve reported today that Household Debt Service for Q1 2006, as a percent of disposable personal income, set another all time record of 13.93%.
For homeowners, the Financial Obligations Ratio (FOR) was 17.59% and the mortgage component of FOR was 11.41%; both new all time records.
DEFINITIONS: 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.
The extraordinary level of indebtedness (and debt service), compared to historical levels, might explain why Personal Consumption Expenditures (PCE) have grown faster than personal income (PI) in recent years.
The chart above shows PCE as a percent of Personal Income for the last 50 years. For the last few years, this ratio has been close to 85%; far above the normal range. The result has been a negative savings rate for the last year. (See: Savings Rate Quarterly, Savings Rate monthly)
It appears households have borrowed against their homes to maintain their lifestyles and consumption. As the housing bubble continues to unwind, this might impact PCE in the future as some households struggle with their debt service.
On a related note, with the new bankruptcy law, homeowners cannot easily walk away from their mortgage debt like during the housing busts of the early ’80s and ’90s. See this article from the OC Register: Refi loans could prove costly in foreclosure
Best Regards, CR Calculated Risk