Transcript Household Leveraging and Deleveraging

Household Leveraging and
Deleveraging
Karen Dynan
Brookings Institution
May 20, 2010
2
Household Leveraging and Deleveraging
Ratio of Debt to Disposable Personal Income
1.4
1.2
Q4
1
.8
.6
1960
1965
1970
1975
1980
Source: U.S. Flow of Funds Accounts
1985
1990
1995
2000
2005
2010
3
Big Questions
• About the past: What explains the pre-crisis
uptrend in debt? Were these factors a good or
bad thing for households and the economy?
• About the present: How is the deleveraging
occurring? Is the deleveraging a good or bad
thing for households and the economy?
• About the future: How much more deleveraging
should we expect?
4
Why Did Household Debt Rise?
“The most important factors behind the rise in debt
and the associated decline in saving out of current
income have probably been the combination of
increasing house prices and financial innovation.”
Dynan and Kohn, The Rise in U.S. Household Indebtedness: Causes
and Consequences (2007)
5
Home Prices and Rising Debt
Composition of the Aggregate D/Y
Home Mortgage Debt and House Prices
1.4
1.4
20
20
Home Mortgage Debt
Q4
1.2
1.2
.8
.6
Home Mortgage Debt
.4
10
4-Qtr Percent Change
Ratio
1
10
1
.8
0
0
House Prices
.6
.4
.2
-10
-10
-20
-20
.2
Other Debt
0
0
1980
1985
1990
Source: U.S. Flow of Funds Accounts
1995
2000
2005
2010
1980
1985
1990
1995
2000
Source: U.S. Flow of Funds Accounts and First American CoreLogic
Debt data through 2009q4. House price data through Feb. 2010
2005
2010
6
Financial Innovation and Rising Debt
• “Democratization” of credit explains only a small
part of the rise.
• Rather, the key factors were easier access and
lower cost of credit for those who already had
access to debt markets.
• Note that quantifying the role of FI difficult:
» FI broad and has occurred gradually.
» FI has interacted with other factors.
7
Evolution of Median Household Debt by
Demographic Group
Consistent with the
incremental and
thorough-going nature
of financial innovation,
increases in borrowing
have been gradual and
widespread.
8
Consequences of Greater Credit
Availability
“Developments in lending practices and loans
markets that have enhanced the ability of households
and firms to borrow … should be added to the list of
likely contributors to the mid-1980s stabilization.”
Dynan, Elmendorf, and Sichel, Can Financial Innovation Help to
Explain the Reduced Volatility of Economic Activity? (2006)
9
Greater Access to Credit Probably Explains
Reduced Sensitivity of Consumption to
Income Declines after Mid-1980s
10
BUT, downsides to greater access to
credit have become painfully clear …
11
Share of Income Committed to Debt
Service Has Risen
• From Dynan (Journal of Economic Perspectives,
2009):
» Median DSR rose from .05 in 1983 to .13 in
2007.
» Percent of households with DSR > 0.40 rose
from 4% in 1983 to 11% in 2007.
• Households with higher DSRs more likely to have
trouble making payments.
12
Greater Leverage Has Increased
Exposure to House Price Shocks
Change in Wealth Implied by a 20% Decline in House
Prices (as a Fraction of Income)
1983
1995
2007
All Households
-.30
-.33
-.49
Households in
Lowest 1/3 of
Income Distn
-.46
-.57
-.77
Source: Dynan (2009) based on the Survey of Consumer Finances.
13
Lessons about Household Leverage
• Useful for getting around income constraints …
» To smooth consumption.
» To pursue higher returns via investment.
• But exposes households to more risk if things do
not turn out as expected.
• FURTHER, financial crisis has taught us that it
can hurt a much broader group than those who
borrow if risk-taking is correlated across
households.
14
Household Deleveraging
15
Both Mortgage and Consumer Debt
Are Shrinking
1,000
0
500
-500
Billions of Dollars
1,500
Household Debt Growth
q1 q2 q3 q4 q1 q2 q3 q4
2005
2006
q1 q2 q3 q4
q1 q2 q3 q4
2007
2008
Home Mortgage Debt
q1 q2 q3 q4 q1
2009
2010
Consumer Credit Debt
Source: U.S. Flow of Funds Accounts and Fed G.19 data release.
2010q1 consumer credit is estimated
16
How is deleveraging occurring?
17
Importance of Defaults
Charge-offs of Consumer Loans
10
10
Q4
8
8
If charge-offs had not been
unusually elevated …
Credit Card Loans
6
6
4
4
2
Q4
Other Consumer Loans
2
0
0
2000
2002
2004
2006
2008
2010
Source: FFIEC Consolidated Reports of Condition and Income
Consumer credit would have
declined 2¾% in 2009 instead
of declining 4½% (charge-offs
explain 60% of decline).
Charge-offs of Residential Mortgage Debt
Q4
2.5
2
2.5
2
All
Mortgages
1.5
1
1.5
1
.5
At Commercial Banks
.5
0
0
2000q1
2002q3
2005q1
2007q3
Sources: Federal Reserve Board and Fed Economist Jim Kennedy
2010q1
Mortgage debt would have
been flat in 2009 instead of
declining 2% (charge-offs
explain all of decline).
18
Evidence of Supply Constraints
Net Percent of Banks Tightening Standards
Banks Tightening Consumer Lending Standards
60
40
20
0
Banks Tightening Mortgage Lending Standards
100
100
75
75
60
Other Loans
40
Subprime
50
50
Nontraditional
20
25
Credit Cards
Prime
25
All
Q1 0
0
-20
Q1
-20
2000
2002
2004
Source: Fed Senior Loan Officer Survey
2006
2008
2010
2000
2002
2004
Source: Fed Senior Loan Officer Survey
2006
2008
2010
0
19
More Evidence of Supply Constraints
• Loan officer survey: 2/3 reported loan standards
for nonprime households unlikely to return to
long-term averages “for foreseeable future.”
• Private nonprime mortgage market still closed.
• Lower credit card limits, higher LTVs on new car
loans.
• More austere regulatory environment (CARD act,
new HOEPA regs, push for CFPA).
20
Demand for Loans Also Down
• Not surprising in a downturn when demand for
consumer goods and services falling.
• 1/5 of senior loan officers (on net) reported that
demand for consumer loans had fallen relative to
3 months earlier in May 2010 (well after
consumption trough).
• But, signal from other possible indicators of
greater prudence among households fairly weak.
21
Disentangling Supply vs. Demand
Selected Household Interest Rates
15
15
10
Used Cars
10
Rate
30 Yr Conventional
Mortgages
Feb
Apr
5
Feb
5
New Cars
0
0
2000
2002
Looking at price is a
traditional way to see if
demand or supply effects
are more important.
2004
2006
2008
2010
Sources: Freddie Mac Primary Mortgage Market Survey. Fed. Reserve Release G.20.
Car loan rates are from subsidiaries of the three major U.S. auto manufacturers.
But these measures tell
us only part of story
because there is nonprice rationing too.
22
Is the Deleveraging a Good Thing or
Bad Thing for the Economy?
• Short run: Inability / unwillingness to borrow is
dampening the pace of recovery.
• Longer run: Deleveraging puts households and
the broader economy in a more solid and
sustainable position.
» Regardless of how it occurs.
» Lower debt service payments have already
made much more cash available for spending.
23
Aggregate DSR Has Fallen by 1.25
Percentage Points
Household Debt Service Ratio
14
14
13
13
Q4
12
12
11
11
10
10
1980
1985
1990
Source: U.S. Federal Reserve.
1995
2000
2005
2010
24
Looking Ahead
25
High D/A Suggests Potential for
Considerably More Deleveraging
Aggregate Household Debt/Asset Ratio
.22
.22
Q4 .2
Ratio
.2
.18
.18
.16
.16
.14
.14
.12
.12
1980
1985
1990
Source: U.S. Flow of Funds Accounts.
1995
2000
2005
2010
26
Future Deleveraging Most Likely to
Occur in the Mortgage Area
• Mortgage charge-offs likely to remain high.
» Foreclosures are on the rise again after having
been forestalled by HAMP and other factors.
• Even as lenders’ standards ease, new borrowing
should be dampened by lack of home equity.
» CoreLogic: Close to 30% of mortgage
borrowers have little or no equity (50% or more
in the hardest-hit states).
27
Scope for Further Deleveraging in the
Consumer Credit Area Less Clear
• Delinquency rates are very high, particularly for
credit cards, and soft labor markets should keep
them high => more charge-offs to come.
• But borrowing is likely to pick up with consumer
demand.
• Q1 saw first increase in outstanding consumer
credit since 2008:Q3 (up 0.4% but if charge-offs
not elevated the increase would have been
around 3%).
28
Conclusions
• More deleveraging seems likely, especially in the
mortgage area.
• The deleveraging reflects a combination of
households defaulting and borrowing less
(different in some ways but gets them to the
same place).
• Big unanswered question: Who is deleveraging?