The financial crisis began with too much borrowing, and it won’t be over until the debt burden of American households is manageable. The chart below shows household debt payments as a percentage of disposable income on a quarterly basis since 1985.
Back then, the country had just emerged from a harsh “double-dip” recession and households were just starting to borrow again. The 1991 recession brought on another retrenchment. But, as the long expansion of the Clinton years took hold, we built our debt burden back and then some. By the first quarter of 2008, nearly 14% of our disposable income went to pay debts. The percentage has been falling ever since, but it still has a long way to go before reaching a more reasonable level.
What is a reasonable level? The table below also covers the period 1985 through 2009. It slices and dices households and their debts into several groupings. The first two columns, in yellow, cover all households. The next column, in green, covers renters only, while the three blue columns reflect the debts of homeowners. The first row of percentages shows the ratio of debt service to disposable income for the fourth quarter of 2009. The next two rows show the averages and medians for the whole period. The last two rows show the variances between the last quarter and the long-term trends.
The story is compelling. All households have reduced consumer debt obligations, which are now below historical levels as a percentage of income. Mortgage debt payments have been reduced but are still almost 1% above long-term trend. Looking farther back, the difference is starker. For the 10 years 1985 through 1994, mortgage debt absorbed 9.79% of disposable income. It actually dropped to 9.11% in the following ten years.
It’s taken about two years for mortgage debt service to drop from a peak of 11.30% to 10.55% as a percentage of income. Assuming—and it’s a big assumption—the same rate of decline going forward, the percentage will fall below 10% in two years more. That’s not a bad proxy for how long it will take for the economy to return to full strength.