Consumer Debt Way Down

The Federal Reserve will be releasing the FOMC minutes for the meeting of September 16-17, when the central bank declined to edge interest rates up even a pittance, but the minutes are unlikely to offer an useful information about future actions.

The Federal Reserve will be releasing the FOMC minutes for the meeting of September 16-17, when the central bank declined to edge interest rates up even a pittance, but the minutes are unlikely to offer an useful information about future actions. Ahead of the minutes—on Wednesday, in fact—the Fed released calculations that have a bearing on consumer spending, which is naturally of interest especially to retail tenants and landlords. The news represents a trend that’s been going on a while. Namely, Americans are less indebted than they’ve been in years, both for mortgages and other kinds of debt. Wages might not be going up much, but even so that theoretically leaves money for other things.

As of the second quarter of this year, household debt service payments as a percentage of disposable personal income totaled just a hair more than 10 percent: 10.06 percent, to be precise. Of that total, 4.61 percent of income, on average, is going to pay a mortgage, while 5.46 percent goes to other consumer debt. These are averages, of course, and anyone who actually has a mortgage—roughly a third of households do not—is going to pay more than that. Even so, the trend is clear: back in 2007, the aggregate total reached as high as 13 percent, and it’s been down since then. Households were overloaded with mortgage debt in 2000s: as much as 7 percent in 2007.

Each quarter’s data points might not be overly meaningful, as the Fed is clear to state: “The limitations of current sources of data make the calculation of the ratio especially difficult,” it said in its report. “The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households. Nonetheless, this approximation is useful to the extent that, by using the same method and data series over time, it generates a time series that captures the important changes in the household debt service burden.”

But it’s also possible that lower mortgage debt points to a chronic weakness in the economy, in that some households who could sustain a mortgage are being denied one because of too-tight lending standards. That would help keep mortgage debt down as well. The National Association of Realtors, at least, has been harping on that point for years, and there are signs that the housing market is indeed weaker than it should be, except in certain rarified markets (like Miami), in part because of underwriting standards. A weak housing market isn’t, in the long run, good for commercial real estate.