U.S. families’ debt loads decline to pre-recession levels


WASHINGTON — After a long period of consumer retrenchment, U.S. families have cut their once-out-of-control debt loads down to pre-recession levels, largely removing one major obstacle to a faster economic recovery.

The amount of home mortgages, credit card debt and most other consumer liabilities now stands on par with 2006 or earlier, according to calculations by Moody’s Analytics. The notable exception is student loans, which have skyrocketed in recent years, with people flooding into schools and college costs soaring.

Overall, households today are paying less than 16% of after-tax income to cover debt payments and lease obligations, the smallest share since 1984, Federal Reserve data show.


Few experts are expecting a big ramp up in people’s spending any time soon: Consumers remain cautious because of what they’ve been through over the last five years and because of uncertainty about what lies ahead.

“It’s sort of a new reality that you have,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “We’re going to try to live within our means because living beyond it didn’t work out.”

A massive number of foreclosures and a new frugality on the part of many households have helped reduce liabilities. Now the long process of shedding debt seems about over, and that alone should benefit the economy.

With less debt weighing them down, consumers are feeling more upbeat today than they have in five years, according to the Thomson Reuters/University of Michigan survey of consumers this month. And that could translate into a little more spending and risk-taking.

Many economists, though, remain wary about the economic outlook.

This month, the International Monetary Fund issued its most pessimistic forecast for global growth since 2009, warning that risks of a serious slowdown are “alarmingly high.” Concerns include weaker growth in China and other major developing economies, as well as ongoing recessions in the Eurozone.

In the U.S., job growth has been mediocre, and workers’ inflation-adjusted earnings stagnant. And many businesses and individuals are bracing for at least some tax hikes next year, or the possibility of something potentially much worse if Washington policymakers don’t head off an array of fiscal spending cuts and deeper tax increases set to take effect in January.


One important test of consumer sentiment will come next month when the holiday shopping season starts.

“You’re comforted that it’s receded by as much as it has,” Michael Niemira, chief economist at the International Council of Shopping Centers, said of household debt. “But what you don’t know is whether there’s a higher consumer willingness to take on more debt.”

As many economists see it, incomes simply aren’t growing fast enough to support a more rapid pace of spending. A recovering housing market should give a boost to consumption, but the nation is also aging, with more baby boomers moving into years in which they typically buy fewer goods.

For this holiday shopping season, Niemira’s trade group is projecting a 3% increase compared with a year earlier — a solid growth rate but down from last year’s 3.3% increase over 2010’s holidays.

Debbie Aslakson of Muskegon, Mich., said she and her husband have shaved their debts but haven’t yet shaken off their bunker mentality.

“We’ve become very frugal,” said Aslakson, who is in her 50s and has been working sporadically because of health problems. Her husband works full time as a nurse, and he recently bought a computer, she said, but only because the last one “completely fell apart.”


The Aslaksons aren’t deep in debt, but she said it was a mistake for the couple to take out a home equity loan before the housing market crashed. They used the cash to buy a new car.

“The thing is, it’ll be paid off this year, which I’m very happy about,” she said of the second mortgage. “Then we can make more payments on other things.”

Those include credit card debt, of which she would only say: “It’s a lot less than we had two years ago, but it’s higher than we’d like it to be.”

American households were carrying an average credit card balance of $4,940 in the second quarter — down 24% from a peak of $6,500 in the second half of 2008, according to Moody’s. The number of credit cards in circulation has dropped to about 470 million from nearly 600 million in 2008.

Statistics from Moody’s and the Federal Reserve Bank of New York show that total household debt peaked in the third quarter of 2008 and has since fallen steadily. Apart from student loans, delinquency rates for most types of household loans also have dropped from highs in 2009 and 2010.

As encouraging as these data are, the picture is more complicated beneath the surface, said Karen Dynan, a former senior advisor at the Fed now at the Brookings Institution.


Foreclosures wiped out a lot of household liabilities, she said, and the amount of debt reduction has been very uneven among consumers.

“While some households have dramatically reduced their debt load by defaulting” mainly on home loans, she wrote recently, “others who found themselves highly leveraged immediately following the financial crisis have remained so.”

What’s more, although lower interest rates have helped higher-income or qualified borrowers get even cheaper financing, many others with weaker credit scores have had far less success.

“It’s become more polarized,” said Richard Cirelli, president of RTC Mortgage Corp. in Laguna Beach, using a term that has come to characterize job growth and broader economic trends in America. “The ones who can are taking advantage of it. The ones who can’t are probably getting deeper into debt.”

About a year ago, Irwin Resnick and his wife were thrilled to refinance the $85,000 mortgage on their home in Delray Beach, Fla. For eight years, they had a 30-year loan with a rate of 6.75%. They cut both the loan term and the interest rate in half.

“We knocked seven years off our term and are paying about $35 a month less than before,” he said.


Thirty miles down the southern Florida coastline, Mike Vaupel Jr., 34, remains stuck in debt.

During the bubble years, he easily got three credit cards with a total limit of $25,000. Vaupel maxed out on the cards, using them to buy a car and pay off a loan that he took out to go to broadcasting trade school.

As long as he was employed, he had enough to service those debts, making a little more than the minimum payments every month.

But in early 2010, he said, “the wheels fell off.” He lost his job at a radio station, and with a baby on the way later that year, Vaupel and his wife moved into his parents’ home, where they have been ever since.

Unable to keep up with his monthly payments, the interest rate on the cards shot up, and what was once a balance of $25,000 ballooned to $34,000.

Vaupel recently landed a job as a security guard, making $9.80 an hour. He also helps out at his wife’s cleaning business. The couple plan to move into their own apartment soon, and Vaupel is working up a plan to pay down their debts, though he knows it will be a long and slow process.


“I don’t want this hanging over my head,” he said.