Consumers in Good Shape, Fed Chief Says
Federal Reserve Chairman Alan Greenspan said Monday that U.S. consumers seemed to be in generally good financial shape and able to carry more debt comfortably because they were cushioned by rising home prices.
Homeowners have done well, keeping their debt burden under control. It has been easier to do so because mortgage rates have been at historically low levels and there has been “an enormous wave” of refinancing, he said.
“Overall, the household sector seems to be in good shape,” Greenspan told the Credit Union National Assn. Although many homeowners have taken on more debt in the last decade, he said, that did not suggest increasing financial stress.
Bankruptcy rates have risen to “an unusually high level,” the Fed chief said, but the increase could not be taken as a reliable gauge of the household sector’s health because it did not forecast the future.
A better predictor was payment delinquency rates. “The recent experience with some delinquency rates has been encouraging, with rates falling for several measures of credit card and automobile debt,” Greenspan said.
He said both the debt service ratio and financial obligations ratio -- which measure how much of a household’s income is devoted to paying its debt and to paying other recurring expenses such as rents and property taxes -- “have been essentially flat” in the last two years.
Greenspan noted that the ratio of net worth to income was higher than its long-run average because household assets had been rising. Debt-to-income ratios have been rising for half a century, but he said that was not troubling because more alternatives had become available for managing debt.
Although credit card debt has risen, that was not necessarily an indicator of financial weakness, Greenspan said. Instead, it was a reflection of more widespread use of credit cards as a method of payment, he said.