Tuesday, May 19, 2009

Households seek less debt

A letter out of the Federal Reserve Bank of San Fransisco shows that American households are a lot like their banks, neither wants to be carrying much debt right now. The Federal Reserve Bank looked at the ratio of household debt to personal disposable income and found that since the recession began there has been a slight decline. From an all time high of 133 percent in 2007, the ratio now stands at 130 percent.

According the the report, "going forward it seems probable that many US households will reduce their debt." The report even finds that the US could face a situation similar to Japan in the 1990's and push the debt ratio below 100 percent. This all makes sense given that the most prominent avenue to wealth creation in the US his home ownership, which has seen rapid declines in value over the last year. As the New York Times reported in March, household wealth dropped about 9 percent in 2008. Yet house prices have fallen faster, almost 19 percent year over year in 2008 and 30 percent from their 2006 peak.

An honest deleveraging will require casting off much more debt. Of course, given that much of this is mortgage debt there is likely to be a long adjustment

No comments: