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US households continue to build debt resilience [ClearOnMoney]
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US households continue to build debt resilience

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Commentary

US households continue to build debt resilience

8 Apr 2013 by Jim Fickett.

US household debt continued to drop through Q4 of 2012, and the household financial obligations ratio is currently low. If we do have another credit crisis in the next couple years, the epicenter is likely to be junk-rated companies rather than households.

Last month the Federal Reserve reported household balance sheet data through Q4 of 2012, as part of the quarterly Flow of Funds report. Here are the data for household liabilities, normalized by household disposable income from NIPA table 2.1:

The drop in overall liabilities, probably driven mainly by mortgage defaults, did not slow through 2012. Growth in overall liabilities is now somewhat below the long-term trend, with the unhealthy bulge of the boom years now reversed.

With liabilities down and interest rates at record lows, the household financial obligations ratio is now at the low end of its historical range (this ratio is calculated as the sum of required debt and lease payments, insurance premiums, and property tax, as a percentage of disposable income). This could change, of course, if interest rates rise. However it does show that households have considerably more flexibility, going into any new stressful period, than they had before the crisis.

The housing market could certainly get out of hand again, and we could see households build up unreasonable debt. But for now it seems likely that the main problem is elsewhere. Huge flows of money have gone into junk bonds, as investors desperately seek higher yields. These flows have provided cheap financing to companies of questionable viability. That is likely to be a much bigger problem than household credit, if we have another credit crisis in the next couple years.

(See the Reference page US household liabilities for background, sources, and past commentary.)