What are some common measures of household indebtedness?

What are some common measures of household indebtedness?

Measures of household debt service

The Federal Reserve Board in Washington, D.C., calculates two frequently used summary measures of household debt burden: the household debt service ratio and the household financial obligation ratio.2 Both ratios measure what it takes for households to meet their minimum debt or financial commitments; this approach has the advantage of taking into account the effects of changes in the level of debt as well as changes in the cost of debt (interest rates):

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 homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases.3

For this analysis, I’ll focus on the narrower DSR because most of the increase in debt in recent years has come from increases in home mortgage debt. Let’s take a look at that measure graphically:

Chart 1

As shown in Chart 1, until the recent recession began (recessions are indicated with gray bars), American households had been putting an increasing share of their disposable income towards meeting their mortgage and consumer debt obligations. From around 1993, when this share was less than 11 percent of disposable personal income, until late 2006/early 2007 when this figure reached about 14 percent, the ratio had been on an upwards trend. However, the debt service ratio began to decline sharply during the recession that began in December 2007, falling to about 13.5 percent by the end of the first quarter of 2009.

Total household debt

Another common approach to assessing household indebtedness is to compare the level of household debt to income. Chart 2 shows how nominal disposable personal income and household debt outstanding have grown in recent decades:

Chart 2



A review of Chart 2 shows that nominal (not adjusted for inflation) mortgage and consumer household debt outstanding have grown much more rapidly than nominal disposable personal income since around the mid-1990s. By the end of 2001, household indebtedness outstanding reached about $8 trillion, matching the disposable personal income earned by households that year. After 2001, household indebtedness continued to grow faster than disposable personal income until the onset of the recession in 2007, when household debt began to fall slightly—something that is highly unusual. Household debt outstanding peaked at $13.9 trillion in mid-2008 when annual disposable personal income stood at $10.7 trillion.

Household “indebtedness”

When thinking about the two data series shown in Chart 2, economists (Dynan and Kohn, 2007, for example) calculate the ratio of household debt outstanding to disposable personal income. This ratio is shown in Chart 3:

Chart 3

An indebtedness ratio (for more information see Dynan and Kohn 2007) above 100 percent indicates that the household debt outstanding is larger than the annual flow of disposable personal income (a ratio of less than 100 percent means the opposite). In 2002, the indebtedness ratio crossed the 100 percent mark, and it grew steadily until 2007. This ratio peaked at about 130 percent during late 2007/ early 2008 and began to fall as the impact of the financial crisis and recession hit households. The ratio fell to about 128 percent by the end of the first quarter of 2009. For another interpretation of the relationship between these two series, both for the US and internationally, please see Glick and Lansing (2009, 2010).