The Federal Reserve recently released their quarter-end data, including an interesting ratio outlaying Total Household Debt to Annual After-Tax Income, as shown in the chart below.
For the first time since 2002, the average American household held a 106% debt to income ratio, down considerably from the 131% debt to income level in 2007. This ratio consists of individual household debt, which includes mortgage and consumer debt, compared to after-tax (disposable) income. As an individual’s debt decreases relative to their income levels, this percentage decreases, and vice-versa. This of course is a positive sign as consumers deleverage their debt in relation to their disposable income, but provided long-term context, we realize that we aren’t quite out of the woods just yet.
As shown in the chart, the 1980s and 1990s ranged in the 70%-80% debt to income levels. It wasn’t until 1997 that our debt to income ratio exceeded 90%, but that was soon to change come the turn of the new century. The debt to income level quickly rose to 100% by 2001, and continued to sharply increase until it peaked at 131% at the end of 2007.
The decline in debt to income level since 2007 is definitely a good sign that we are headed in the right direction, but it is important to note that we still have a ways to go in the deleveraging process.
Jon Houk, CFP®