Wednesday, February 22, 2012
Darryl E. Getter
Specialist in Financial Economics
Since the third quarter of 2008, U.S. household debt has steadily fallen. Household debt reduction is known as deleveraging, and such substantial and persistent deleveraging (reflected in Federal Reserve data) has been uncommon over the past several decades. Given that much household debt is used to finance consumption, which accounts for about 70% of gross domestic product, continued deleveraging implies slower consumption growth and economic recovery. Beginning in the third quarter of 2007, household net worth (i.e., the difference between the value of assets and liabilities) preceded the fall in household debt. The recent drop in household net worth has also been substantial and persistent relative to previous decades and, therefore, may arguably have precipitated such pronounced household deleveraging.
Household deleveraging may dampen the immediate effectiveness of legislative efforts to generate economic stimulus. For example, H.R. 363 and its companion S. 170, the Housing Opportunity and Mortgage Equity Act of 2011, were introduced to facilitate the refinancing of mortgages held by the government-sponsored enterprises. In addition, the Obama Administration announced an initiative to assist qualified homeowners with privately held mortgages refinance into lower rate loans. If refinancing activity results in lower mortgage payments, then households may have more discretionary income to spend and, therefore, spur economic stimulus. Given the trend of household debt reduction, the additional income that would have gone toward paying mortgage interest still may not be applied to new spending. Households may prefer using the additional income to pay down current debt obligations. Hence, such legislative efforts may enhance future borrowing capacity and long-term consumption if households continue to strengthen their balance sheets via deleveraging, but the effect on near-term consumption activity may be modest.
This report presents information on recent household debt usage patterns. It also discusses possible reasons for the reduction in household credit use. Consumers have reduced their indebtedness by accelerating repayment of outstanding debts and defaulting on loan obligations. Lenders have also tightened lending standards. Hence, both demand and supply factors can explain the decline in household credit usage.
Date of Report: February 6, 2012
Number of Pages: 13
Order Number: R41623
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