Household debt

Household debt is defined as the combined debt of all people in a household. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries. Household debt is defined as the combined debt of all people in a household. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries. Household debt can be defined in several ways, based on what types of debt are included. Common debt types include home mortgages, home equity loans, auto loans, student loans, and credit cards. Household debt can also be measured across an economy, to measure how indebted households are relative to various measures of income (e.g., pre-tax and disposable income) or relative to the size of the economy (GDP). The burden of debt can also be measured in terms of the amount of interest it generates relative to the income of the borrower. For example, the U.S. Federal Reserve measures the 'household debt service ratio' (DSR), an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The Fed also measures the 'financial obligations ratio' (FOR), which adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio. Homeowner and renter FORs are calculated by applying homeowner and renter shares of payments and income derived from the Survey of Consumer Finances and Current Population Survey to the numerator and denominator of the FOR. The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases. In the 20th century, spending on consumer durables rose significantly. Household debt rose as living standards rose, and consumers demanded an array of durable goods. These included major durables like high-end electronics, vehicles, and appliances, that were purchased with credit. Easy credit encouraged a shift from saving to spending. Households in developed countries significantly increased their household debt relative to their disposable income and GDP from 1980 to 2007 — one of the many factors behind the U.S. and European crises of 2007–2012. Research indicates that U.S. household debt increased from 43% to 62% of GDP from 1982 to 2000. Looking at the early years of the 21st century, many industrialized countries, with a notable exception of Germany, experienced a major spike of household debt versus GDP around 2007–8, with the United States leading up to 2007; by 2017, the American ratio was second only to that of the United Kingdom. U.S. households made significant progress in deleveraging (reducing debt) post-crisis, much of it due to foreclosures and financial institution debt write-downs. By some measures, consumers began to add certain types of debt again in 2012, a sign that the economy may be improving as this borrowing supports consumption. The International Monetary Fund (IMF) reported in April 2012: 'Household debt soared in the years leading up to the Great Recession. In advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. This occurred largely because the central banks implemented a prolonged period of artificially low policy interest rates, temporarily increasing the amount of debt that could be serviced with a given income. The leveraging up fueled a consumption boom that, ironically, boosted GDP in the countries in question, but represented not a sustainable 'boost to aggregate demand' but instead a mere pulling forward of consumption, as people took on new 30-40 year debt to pay for current year expenditures.