Consumer grows increasingly levered

We’ve addressed this issue previously, but Doug Kass summed up the specifics perfectly:

The facts are indisputable – the consumer has grown increasingly levered just when interest rates are rising and the large amount of mortgages based on teaser rates are about to be reset.

The facts speak for themselves:

• Non-discretionary consumer spending (for items like food, energy, medical expenses and interest payments) which vacillated in the 44% to 47% range until 2000 has now risen to 54%.

• Household debt/household assets is at an all-time record high (up from 14% six years ago to nearly 19% today).

• Despite the outsized gains in the value of the housing stock, the magnitude of the cash outs have resulted in an historic low in the ratio of home equity/home market value.

This ratio stood at 57% in 2006 compared to a peak of 70% twenty years ago.

• Household debt/GDP has never been higher. It is now at 88% compared to only 63% after the recession of the early 1990s.

• Mortgage debt/GDP has doubled over the last twenty years (63% versus 31%).

As we discussed yesterday in the post on the BusinessWeek Cover Story, most people instinctively understand their own financial situations.

All is not well on the home front . . .

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  1. commented on Feb 8

    Consumer Debt Growth

    Barry Ritholtz:The facts are indisputable – the consumer has grown increasingly levered just when interest rates are rising and the large amount of mortgages based on teaser rates are about to be reset. The facts speak for themselves:Non-discretionary …

  2. Barry Ritholtz commented on Feb 8

    The 3rd chart is pretty brutal also — I’ll address them later today or tomorrow

  3. calmo commented on Feb 8

    And therefore you are penciling in a prime rate peak of 4.5% …or adding 2 bits for Bernanke to show that you, too, need to see that he is continuing the fine (if somewhat boring) tradition of ‘another meeting another 25bp’ that the illustrious Alan Greenspan has presided over these past 20 months?
    The FOMC nature abhors a discontinuity.
    Sorta, unless the sliding housing numbers become impossible to ignore, then Bernanke may feel that the tradition, esp the first step of its continuence, may warrant this bold move of …holding at 4.5%.
    Such is the drama unfolding at the Fed.

  4. B commented on Feb 9

    I feel like the lone person on planet earth defending the American consumer’s position. Btw, it isn’t just the American consumer that has a negative savings rate. There are a handful of countries including Australia.

    That said, I think that statistic is so oversimplified and inaccurate. Of course, the only way we will ever know is if bankruptcies go through the roof for an extended period of time. There is no correlation to the stock market and consumer debt.

    And, while I feel like I am blathering to myself, consumer debt WITHOUT mortgages is lower than it was half a dozen years ago. And, although there seems to be some small percentage differences in different stats, the same or lower than 1980.

    And while no one ever talks about it, consumer debt in the 70s and consumer debt today, although everyone says this stat has never changed, is a totally different measurement. The amount of wealth in equities, bonds and other non cash investments are much different today than thirty years ago. Thirty years ago, the average joe owned next to no investments other than cashed base investments or many owned none. The same people I can think of today who had none of those investments thirty years ago now have cumulatively millions in noncash investments.

    Uhhh………noncash investments are NOT included in this statistic of negative savings. Cumulatively, that is…what? Tens of trillions of dollars? Will the consumer slow down spending? I think they already have. Because they are uneasy. Not because they are broke. The only way I will ever believe this statistic is a mad rush of massive bankruptcies. In fact, that is really the only way it can be proven from all angles I see. And I just don’t see high mortgage debt as a guarantee there are problems.

    I do believe we will get our usual correction. Maybe it will be a doozy. The last time GDP fell of the cliff like this, we got hammered bad. The double whammy of what is surely higher interest rates being telegraphed by quite a few measures will surely assist that correction.

    I do fear government’s fiscally irresponsible spending that is likely goosing the economy as well as all of the other messes it creates.

    Just an opinion from a lone dissenter.

  5. Idaho_Spud commented on Feb 9


    You make an excellent point. The median net worth of Americans is probably better than it’s ever been. To be honest, I ‘save’ like crazy in my 401(k). But that’s because I know too damn well that SS won’t be there when I need it.

    But I also don’t believe that it’s wise to blur the line between investing and saving. Saving means $1 in = $1 out.

    Investing is something else entirely… as an ex CSCO and CPN investor I can assure you that investments are *not* savings, and you can’t count on getting all (or any of) your money back!

    Now to my fellow countrymen, who think they’re suddenly “rich” by virtue of having the profound wisdom of merely owning a home, without ever having worked for it or saved a frigging dime, I think they are *idiots*.

  6. dc pol commented on Feb 9

    I have never understood the logic behind looking at the ratio of a stock (debt) to a flow (GDP). Doesn’t it make more sense to look at the ratio of a flow (debt service) to a flow (GDP) or a stock (debt) to a stock (wealth)? Since flows fulctuate and stocks accumulate, the ratio of a stock to a flow almost always gives a chart that looks like the side of a mountain.

  7. B commented on Feb 9

    I agree…………and those ratios are measured. If I get some free time, I’ll see if I can dig that data up and post a link on this board.

    Btw, Idaho_Spud, are you JR Simplot? LOL! If so, do you have any daughters that are single? You know, some people only own a house and have no savings because all of the savings they can muster is to buy a house. There are ALOT of poor people in America and alot who are marginalized. Shhh. We just don’t like to talk about it. It makes us feel guilty when we see stuff like Katrina on TV. The minute the press quit covering that, it was out of site, out of mind. We’d rather have this vision in our mind that isn’t so. Most don’t like to think about troubling issues. They have too many problems of their own. One of human’s greatest and saddest traits is compartmentalization.

  8. miami commented on Feb 9

    People seem very concerned about an overall drop in housing prices, but it is wise to note that the national median [not mean] housing prices has not fallen since the Great Depression.

  9. Idaho_Spud commented on Feb 9

    Savings have not been negative since the great depression either…

  10. miami commented on Feb 10

    that’s not true at all, savings rate has been negative before this month.
    Tell me again why realized capital gains should not count as savings?

  11. wildcat commented on Feb 14

    why you quoting the national median home price? whats the one cliche you hear over and over about real estate, location location location, the national median is meaningless. when you buy a house you arent paying the national median price and there has been localized imbalances every year (take a look at texas now, or CA early 90s). besides, the implied leverage when purchasing a house (assuming 20% down or less) means that a small correction in the price of your home will wipe out your equity entirely.

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