Debt Burden

Since consumers make monthly payments on their installment debts and home mortgage loans, it is appropriate to measure trends in debt burden by comparing these monthly payments to monthly disposable (after-tax) personal income. While the data compiled by the Federal Reserve System go back to 1980, the accompanying chart shows the percentage of household debt-service payments to disposable personal income beginning with the last quarter of 1990.

The chart shows that payments on consumer debts and home mortgages rose to 13.51 percent of disposable personal income in the last quarter of 1999. The recent growth in the debt burden is attributable largely to the growth in interest rates on residential mortgages. Between the fourth quarter of 1997 and the fourth quarter of 1999, the debt burden stemming from consumer credit rose by 11 basis points. Over the same period, the debt burden arising from payments on mortgages increased by 23 basis points.

The 13.5 percent measure of the debt burden in the fourth quarter of 1999 tied the previous high of 13.5 percent in the last quarter of 1989. The growth rate of consumer installment credit outstanding fell quite sharply thereafter and bottomed out in 1991. The lowest percentage measure of debt burden in the past decade was 11.6 percent in the fourth quarter of 1993, and growth rates continued at a high rate for several years.

Variable-rate mortgage loans explain at least part of the rise in the burden of mortgage payments. While the monthly payments on variable-rate mortgages have been increasing over the past year, consumers acquiring new fixed-rate mortgages have faced significantly higher interest rates. The reason for the notable increase in the burden of residential mortgage debt is clear from data supplied by HSH Associates. In January 1999, the average rate on 30-year fixed-rate mortgages was 6.90 percent. On June 9, 2000, the average rate was 8.38 percent.

Rates on consumer credit also rose over the past several months, but not by as much as the rates on mortgage loans. Data from the Federal Reserve show that interest rates on 48-month new car loans rose from an average of 8.44 percent in 1999 to 9.21 percent in May, 2000. (These are the latest data available. Also, 60-month loans are much more common than the 48-month loans reported.) In spite of the rising interest rates on auto loans, new car sales in April were the highest for any April in history according to Wards Auto Infobank.