Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Households Have Low Debt Service

January 11, 2018

Analysts disagree about U.S. household debt levels, because they look at different factors.

One group of analysts looks at absolute debt levels and how they are growing. From this, they conclude that we’re in at least as bad shape as before the financial crisis. Households haven’t done anything to reduce their debt burdens.

Other analysts are more sanguine. They point out that when debt is measured as a percentage of GDP or income, it has declined since before the financial crisis. The decline hasn’t been much, and the debt level has started to increased. But as a percentage of income or assets, it is down.

More important, they say, is the debt service level of households. This article points out that because of low interest rates and higher incomes, debt service is quite low. That means current debt levels would cause a problem if interest rates were to rise to historic averages. But if interest rates rise moderately from here, that shouldn’t cause a problem. A sharp rise in rates or a decline in incomes (as in from a recession) could cause problems.

The overall Debt Service Ratio increased in Q3, and has been moving up slowly from the recent record low.  Note: The financial obligation ratio (FOR) also increased in Q3.

The DSR for mortgages (blue) are near the low for the last 35 years.

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