The article from the Federal Reserve Bank of St. Louis discusses the significant changes in household liabilities since the 1990s. Key points include:
Trends in Household Liabilities: There was a 50% increase in the household liability-to-income ratio from the 1990s until the Great Recession, followed by a 20% decrease. The analysis is based on data from the Survey of Consumer Finances.
Composition of Household Debt: The debt is categorized into mortgages, car loans, credit card debt, and other debts. Mortgages constitute the largest portion, over 70% of the liability-to-income ratio. Car loans and credit card debts are smaller, each around 6%, and the rest is classified as "Other."
Period Analysis: The study divides the period into two: 1995-2010 and 2010-2019. In the first period, liabilities relative to income increased by over 50%, followed by a 20% decrease in the second period. The overall trend in household liabilities largely follows that of mortgages due to their size.
Supply and Demand in Loan Market: The article examines changes in supply and demand in the loan market by looking at corresponding interest rates for each debt type. An increase in loan supply relative to demand was inferred from the increase in borrowing and decrease in rates during 1995-2010. Conversely, a decrease in demand relative to supply was indicated by the decrease in borrowing and continued decline in rates from 2010-2019.
Interest Rate Trends: Real interest rates for mortgages, car loans, and credit card debts have generally decreased. Mortgage rates fell from 5% to 2%, car loan rates from 6% to about 4.5%, and credit card rates fluctuated between 10% and 15%. The 10-year Treasury rate also decreased significantly.
Inferences: The initial increase in household liabilities was driven by an increase in the supply of loanable funds, likely due to the growth of mortgage-backed securities. The later decrease in liabilities is attributed to a reduction in demand for loans, possibly influenced by the sluggish recovery from the Great Recession and changes in the housing market.
Conclusion: From 1995 to 2019, household liabilities saw large fluctuations, with an initial increase driven by an increased supply of loanable funds and a subsequent decrease due to reduced loan demand.
The article provides a comprehensive analysis of the changes in household liabilities over the past few decades, highlighting the interplay between loan supply, demand, and interest rates.
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