 | Consumer Debt Close to Normal Levels |
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Late last week the Federal Reserve issued its quarterly report on household debt obligations. The financial obligations ratio (FOR) measures the share of after-tax income that households need to make recurring monthly payments, including mortgages, rent, homeowners' insurance, car loans, car leases, credit card payments, student loans, and all other kinds of debt service. After hitting an all-time record high of 18.9% in early 2008 (data go back to 1980), the FOR is now down to 17.4%. This is barely above the 30-year average of 17.2%.
In particular, the FOR of renters is now the lowest since 1993 and the consumer (non-mortgage) obligations of homeowners is the lowest since 1995. The one part of the FOR that remains elevated is mortgage obligations, which still comprise 10.5% of the after-tax income of homeowners, versus a long-term average of 9.6%. It will probably take another year or two for mortgage obligations to hit the long-term average.
So far, the reduction in the overall FOR looks due, in roughly equal parts, to (1) higher after-tax incomes and (2) lower debt payments. In turn, the reduction in debt payments is largely due to lower debt levels, with a small portion due to lower interest rates.
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