Is Household Debt Still “Too High”?

Mark Gongloff has a good piece in the Huffington Post on households and debt.  He says household debt is still too high.  But he looks at nominal debt levels without comparing them to anything else.  I think you have to put this in the right perspective because high debt levels are not inherently problematic.  High debt levels are problematic when the incomes don’t exist to service those debts.  So we have to compare debt relative to other components.

The primary chart I’ve used over the years to portray the household debt burden was household debt to personal income.  You can see how distorted this got during the run-up to the housing boom.  But it’s also made huge improvement in recent years:


So, is the debt still too high?  We could probably benefit from some more downside in this chart, but given the roaring housing market I wouldn’t be one bit surprised to see that little uptick turn into an uptrend in the coming quarters.  The de-leveraging cycle in the USA is essentially over and while households still aren’t borrowing a lot, they’re really not de-leveraging much either.



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Stephen

    You nailed it here ;”High debt levels are problematic when the incomes don’t exist to service those debts.”
    Doesn’t mean though that there isn’t still a problem. Looking back we note last time debt levels lost touch with the ability to service them was mid 60’s after the post war boom. We also note it took more ,or less 20 years for that overall situation to fully resolve (a generation). This is also why we really need to check our reality this time around ,because it is clear from many comments out there that there is still a strong view that somehow this time it will take much less time to resolve the issue.
    I don’t think so.

  • Indignado

    Cullen, debt, particularly in the housing market is more difficult to service in a rising rate environment. I had asked you in an earlier post what do you think will happen if rates continue to rise. They are rising. At what point does this begin to affect households desire to take on additional debt and when does it begin to render their ability to service their current debt loads. I put to you the question specifically if the 10 year goes above the psychologically important 3% what would the implications be for household releveraging. Thanks

  • Jerry Khachoyan (@TheArmoTrader)

    ”High debt levels are problematic when the incomes don’t exist to service those debts.”

    This is what I worry about. Will wage/income growth be enough for households to service those debts? Right now with ZIRP, its not an issue. As u see, debt payments as % of DPI is at a record low, probably thanks to the deleveraging process and mainly ZIRP.

    But if the FED starts raising interest rates, there’s gonna be a problem. This is why I think ZIRP is going to last longer than people think (2016-2017?), especially if we dive into another recession before the FED starts thinking about the idea of raising rates.

    I dont see the labor market picking up significantly or inflation (in fact, I bet we see more “good deflation”) as of right now, so if FED hasn’t hiked rates by the time we go into another recession (which historically speaking, we are closer to the next one than the last one…), get used to ZIRP for the rest of the decade….lol

  • Cullen Roche

    Debt service ratios are at 30 year lows. The burden from rates is still nothing like it was in 2007.

  • indignado

    Thanks for the response Cullen. But you still haven´t answered my question about rising rates and how it will impact the “releveraging” in the private sector. I understand that rates historically are still very low, but I think there is a huge expectation that rates would stay low indefintiely with ZIRP. Rates are rising even with QE and stated ZIRP.

    I am not arguing that debt service ratios are high today. I am saying that the private sector is scarred and a rise in rates will cause more conservative behaviour and therefore, less releveraging. I don´t agree with you that this “roaring” house market is sustainable. As I mentioned in an earier post, if you look back at the Case Shiller going back to 2000 we are still bouncing around the bottom (even with ZIRP and massive purchases of MBSs by the fed).

    On another note, it is going to be interesting to see what actions that many older savers will take when they see their bond funds taking a pretty good beating over the past few months. The stock market seems over priced and the bond market is trying to find equilibrium. I don´t mean to be overly pessemestic, but I don´t see the private sector releveraging in this environment.

  • JohnM

    Although true that the debt service levels are low, I wonder that with low inflation, the overall cost of debt repayment is actually far worse?

  • Mattson

    while certainly a measure of hh debt burden, it seems misleading to me. How much of the ‘improvement’ is due to default? What standard guideline of hh debt/inc is considered conservative and ‘best practice’ according to reputable community lenders? If we choose the period of time before the explosion of easy credit, then we are moons away from good practice.

    I suppose the inference of the ‘improvement’ is that folks will begin the cycle again and goose the economic numbers. Other factors need to be incorporated to make hh d/i a meaningful data point. Somehow perhaps you can incorporate some measure of consumer willingness to acquire more credit and lender willingness to offer said credit and normalize the data wrt what is considered ‘best practice’?

  • jswede


    this is why comparing stock (debt) to flow (income) can be problematic. in this case it we’re assuming ‘all else equal’ – which, int he case of growth for example, it is clearly not.

  • Anonymous

    Raise the corporate income tax and lower the individual tax rate. Incentivize payout through wages. Kill the immigration bill and offer child care subsidies to encourage organic population growth.

  • srin

    The debt ratio is not low by historical standards, although debt service is low. However, none of these account for the fact that income (the denominator) has become more skewed in the last three decades and debt has become more “democratized.” So, the graph should be really rotated counterclockwise and then it would not look all that great.

  • perpetual_neophyte

    Indignado and Armo –

    You mention the impact of debt and rising interest rates. Keep in mind that a lot of existing household debt is financed with fixed rates. Cars are often financed over 3 – 6 years and homes are mortgaged for 15 – 30 years. For example, if the average mortgage rate in five years is 6.5% (what it was not that long ago), it will have no impact on my ability to service my 3.5% mortgage note or my sub-2.0% car note.

    I am not saying that rising rates are _not_ a potential headwind, especially for new homebuyers already facing challenges with rising home prices or for new car buyers as interest rates rise or for those with home mortgages that are on adjustable rates.

  • Andrea Malagoli

    “…. given the roaring housing market …”

    I appreciate the sarcasm.

  • jmf1928

    I’d think there are a number of problems with the broad leverage data. First, it doesn’t account for the fact that debt can be (but is not necessarily) used to finance long-lived assets. I’d imagine that debt used to finance a home in lieu of paying rent is less worrisome than debt used to furnish a home with flat screens or debt used to finance a home on high leverage in the hope of profiting. Second, it ignores the value of household assets. Households have debts and assets, and net worth as a % of GDP has been at least somewhat more stable, although it has some pretty large spikes as well. Thirdly, it ignores that there is a distribution. You could have debt spread evenly across households and relatively stable economy through ups and downs or you could be bifurcated where one group is highly levered and the other is purely equity financed and see outsized impacts from small economic changes.

    In my mind, debt and equity are simply methods of economic organization. Cash flows get moved from one point in time to another. Debt requires a higher level of predictability and thus creates less flexible systems as it accumulates, the tradeoff between efficiency and resilience). Equity is more flexible, but provides less visibility to the investor and is harder to value. Highly levered systems require everything to go according to plan (or require large interventions to make good on bad promises), but were arguably better at wringing out economic activity in the interim.

  • http://pragcap Michael Schofield

    Given the importance of consumer spending, the correct perspective is the condition of the median. It looks nothing like that chart. We are a long, long, way from the good old days of 3.5% growth for years on end. If we don’t want to burn through available median credit in a short time, growth will have to be slow for years. Obviously, we’re walking a fine line on interest rates. A better question would be how we grow income for the bottom 60% or so. Big problem- labor is the only commodity without an effective lobby.

  • John Daschbach

    As some people have noted more correctly than Cullen, it’s not debt to income that is the important metric, it’s debt service cost to disposable income. To a business or individual that is the cost, the flow of funds required to service the debt.

    Most consumer debt is in housing (about 70%) and that is primarily fixed rate. A rising rate environment won’t hurt people with existing mortgage debt. The biggest effect will be on house prices (lower) and auto sales (lower).

    The only way money is created is through debt. If the real economy grows then if you take out inflation/deflation debt has to continue to grow. The simple arithmetic of the situation is that the only way the real economy can grow without deflation is with debt creation. With consumers are large share of our economy (70% is the common number) it’s very hard to have sustained growth without consumer debt levels rising.

    How this happens does effect growth. Anecdotally, looking at my friends (early 50’s, most with PhD’s, JD’s or MD’s, decent to good household incomes, $150 K to $500 K) they have done what you would expect sensible people to do, refinance their (modest) houses, do a little remodeling, and increase savings to 25% to 35% of income. The current interest rate environment means that many people have been able to slash debt service costs (since they only have housing debt to begin with) but probably a majority of these people have not increased spending to any significant degree.

    In the end these broad measures don’t tell us that much. With debt service costs at historic lows, debt levels should be expanding, and the economy growing. However, those benefitting from the low debt service burden appear not to be spending much of that gain in DPI and those more inclined to spend an increase in DPI have seen a decrease instead (higher taxes, higher gas, higher health insurance, little wage gains, often no ability to refinance houses). So the economy muddles along.

  • Cullen Roche

    No, it’s seriously booming here in CA. I am dead serious. Nothing sits on the market more than a few days….

  • Cullen Roche

    The cost structure of the interest rate curve doesn’t matter much if you don’t have the income to service it. You’ve taken the interest variable and placed it in front of the income variable in terms of importance. That’s not accurate. Interest is a component that impacts income. It is not the key variable. I agree that you can use disposable income if you’d like and the debt service ratio, but that doesn’t make it a better indicator.

    Not sure why every single comment of yours are these subtle jabs at me. I don’t know whether you’re a troll or just difficult….Hmmmm.

  • DRR

    Wow, what a spike in debt loads after the year 2000. I wonder how much of the recent deleveraging has been due to default vs refinance at lower interest costs. vs paying the debt off.

  • Stephen

    I see many references to “Income” made within the context of servicing debt IF rates rise.
    Actually that’s not really the term to use. It’s actually disposable income that is really most important. For example, there have been periods in the past where rates rose ,but actually disposable income coped with increasing financing costs not because of outrageous increases in income ,but because their disposable income effectively ‘increased’ via tax policies and disinflation in energy costs after they boomed in the 70’s and then went to sleep relatively speaking.
    It’s hard to say what we face this time ,but in the US I do wonder if they are going to get some virtuous advantages to disposable income from the recent boom in their energy investment. Even if that only comes about via increased govt revenues and subsequent tax reductions rather than say at the pump.

  • rharaz

    At 40%, the US already has one of the highest statutory corporate tax rates in the world, and is almost double the global average of 24% (Ref 1). However, the Congressional Budget Office stated that the actual percentage of corporate tax revenue collected in 2011 was only around 12% (Ref 2). Much of this difference can be attributed to overseas outsourcing (“off-shoring”) instigated by loop-holes in the tax code and by wage arbitrage.

    Therefore, raising the corporate tax rate further as you suggest will almost certainly entice more corporations to off-shore their labor force, which will result in FEWER JOBS available in the US, likely at LOWER PAY.

    Also, employment might be improved if the costs of our regulatory and general welfare policies were kept to a minimum and waste/fraud was eliminated as much as possible. For example, health care costs in the U.S. have increased significantly over the past 40 years. These increases are due in part to policies which allow monopolistic behavior (Ref 3 & 4) and allow intentional mispricing and cost shifting based on patients’ insurance or lack thereof (Ref 5).

    So perhaps a better solution would be to:
    • Lower the corporate tax rate to a level which is more competitive globally (below 30%).
    • Move toward a territorial based taxation system but, like Japan, tax off-shore profits of corporations which have moved operations to countries whose taxes are below ~20% (i.e. where wages and work conditions would likely not meet U.S. standards), with no loop-holes which allow tax deferral of these profits.
    • Eliminate tax deductions on off-shoring costs.
    • Consider imposing tariffs/imposts on imports from countries which do not provide for the general welfare of their citizens in a similar way that the U.S does.
    • Encourage healthy competition, and reduce costs/waste/fraud as much as possible in our regulatory and general welfare policies in order to reduce tax burdens.

    (Note: the above is a snippet of a letter which I sent to our President and each of my congressional representatives)

    1. Corporate tax rates table,
    2. Damian Paletta, “With Tax Break, Corporate Rate Is Lowest in Decades”, The Wall Street Journal, 2/3/12,
    3. Robert B. Reich, “Bust the Health Care Trusts”, The New York Times, 2/23/2010,
    4. Dylan Ratigan, “Why Would We Let Them Rig the Game?”, Huff Post Business, 9/29/2009,
    5. Beverly Weintraub, “The anatomy of a ripoff”, New York Daily News, 1/8/2012,

  • jaymaster

    I’ve been wondering if demographics might be impacting this.

    I found this data from a US census report. It’s median total debt by age group in 2011:

    Under 35 years old: 45,300
    35 to 44 years old: 108,000
    45 to 54 years old: 86,500
    55 to 64 years old: 70,000
    65 years and over: 26,000

    Our population is currently skewed towards both ends of that table, where the debt is naturally lower. But a decade or so ago, there was a bigger bias to the age groups with higher debt loads.

  • Indignado

    And this is a good thing?

  • Cullen Roche

    It’s just a thing. I don’t know if it’s good or bad yet. But it’s definitely happening.

  • Greg

    I do think there can be issues with simply showing pure debt to income ratios ( I disagree with some who say a stock,debt, shouldnt be compared with a flow, income) similar to simply talking about average incomes.

    What is the mean debt to income level? How many households have debt to income ratios above the 1.10000 or between the 1.0000 and the 1.10000? That might be a more telling predictor. We probably have a lot of people (me for one) who have really deleveraged relative to 2007 and probably many in the 1% carry almost no debt, but many households have lost income, significantly. I think a lot of trouble can be overlooked with this metric of choice.

    Ive also heard that much of the housing action is with cash purchases, (obviously by people in the upper 10% or higher) so its not showing up as mortgage activity.

  • Cullen Roche

    I agree Greg. But I don’t know how to compile that data so we’re left with the nominal figures where we can’t calculate the mean. If someone has that data then I am all for it. But I don’t think it exists. Not as far as I know.

  • Indignado

    Just want to clarify the question. Of course the market recovering in a sustainable manner is very positive, but the “nothing sits on the market for more than a few days” comment rings all kinds of alarm bells in my book.

  • Dennis

    Slightly off topic (as usual). Obama’s recently talked about selling the holdings of Fannie (Federal National Mortgage Association) and Freddie (Federal Home Loan Mortgage Corporation) e.g. the SSE’s currently in conservatorship, back to the banks.

    This sounds like it’s right out of Larry Summers’ mouth. I was wondering what to think about this. These days Uncle Sam is effectively getting the interest via the Fed’s holdings and as the conservator. Obama/Summers want to sell the loans (probably at 50¢ on the dollar), back to the banks et al, thus give up the interest collected BUT keep Uncle Sam’s loan guarantee in place. Who would not want to buy this paper?

    What a give away deal for the banks totally motivated by the banks that want back into this action at NO RISK AT ALL.

  • Indignado

    Interesting post, thanks.

  • Dennis

    *GSE not SSE. If there are no typo’s from me that means I copied from somebody.

  • lessismore

    It is not a good thing because the patient (house prices) is suffering a relapse of its sick fever, rather than continuing its recovery down to healthy levels where the local median house price is not more than about 3 times the local median salary. The whole housing conversation becomes like talking to the Caterpllar.

  • lessismore

    See, the comment just below (indignado, 2:43 pm) calls the relapse “recovery” when he says, “Of course the market recovering in a sustainable manner is very positive.” There seems to be an unexamined assumption running throughout the housing discourse that the phantom equity of 2006 was a good thing rather than a unhealthy bubble, even as it was called an unhealthy bubble.

  • Alfonso

    Would it depend on who’s buying and selling (in determining whether good or bad)?

    Say if every buyer was a perfectly qualified, perfectly gainfully employed, well-diversified (financially) family of four, putting down 20%. And the seller was essentially the same (or at least not a distressed seller, and not a bank). A booming market here would presumably be a good thing, assuming we’re not talking about mid-2000’s activity. Lending would of course be strictly sane and sound.

    Or could the ‘booming’ market be a bunch of distressed sales, investor cash sales, tax lien sales, institutional bulk sales, REO sales, short sales, etc.? This is both good and bad.

    But in CA, what’s booming? Traditional sales or investor sales? Who’s selling?

  • lessismore

    The healthy level means the local median house price is not more than about 3 times the local median salary. When houses prices “depend on who’s buying and selling (in determining whether good or bad),” it only means people are making these determinations out of personal self-interest, rather than using some kind of objective measures.

  • tw

    Great point. In fact, if we do eventually see wage growth and a bit of inflation, that debt will become less relevant…

  • John Daschbach

    No, I haven’t placed a priority on either variable in aggregate. To put it more clearly, the interest rate variable has a smaller impact at the margin for high income households than for lower income households (just based upon recent (ca. 30 yr US behavior) not as a philosophical point).

    The behavior in different groups is completely different. High income households do not consider interest rates as a major component of buying decisions. The only thing they finance, possibly, is a house, and while interest rates may impact their decisions in terms of the balance of capital to financing they use in buying a house. In banking terms, this group (as a whole) is never finance constrained in personal purchasing decisions.

    Lower income households are finance constrained. They borrow money to buy things other than houses, and often when they buy a house it’s near the limit of what they can borrow.

    So the point was that interest rates and debt levels in aggregate really tell us very little. My point was that perhaps (based on my experience) that households that could/have benefitted from low historical rates for housing had not increased their spending flows commensurate with their benefit from refinancing and higher incomes but had increased savings. (which may have boosted stock prices). Lower income households have not benefitted as much from lower interest rates and higher wages and so their impact on the aggregate numbers is different. Lower interest rates (perhaps especially for cars and trucks) may perhaps increase relative credit based consumption (balance sheets may expand, credit may grow) but in the aggregate view this is more than offset in the economy by the reduction in higher income households.

    Household debt for high income households (per household) is at historic lows, and even lower when you evaluate it in terms of cash flow required to meet credit flows. It’s clear that for this segment the impact on the economy is very different from at least the lower income segment. If in fact the signs are different (in terms of spending less(more) based upon lower debt/income ratios then the aggregate metric doesn’t have any statistical validity.

  • Cullen Roche

    Debt service ratios obviously matter. But not nearly as much as income relative to debt. The debt service ratio is just a variable that influences income and the cost of debt. The income flow is much more important. Now, we don’t know the median data here relative to the median debt levels so the analysis is not as useful as I’d like, but whatever. We have to work with what we have, right? Both metrics are useful and both show the same conclusion so I really have no idea what you’re griping about.

    More curiously…100% of your comments now are these sort of mundane gripes about something that usually ends up being rather petty. Almost like you’re trying to debunk something that doesn’t really need to be debunked. It’s worth thinking about before spending so much of your time on comments. We seem to agree on quite a bit so why waste so much time trying to debunk these kinds of points that don’t move the conversation forward? I only point this out because it seems to be a repeated trend with you. But hey, if you don’t think you’re wasting your time then who am I to say you are….Just my two cents on your approach here.

  • Nils

    I’m sure the President took great interest in your letter ;)

  • Alfonso

    Unexamined assumption indeed, well put..