Consumer Survey

The Federal Reserve Board has just released its latest Survey of Consumer Finances. In last month's issue of Spotlight we examined differences across income groups in the types of debt held and changes over the prior decade. This month we will examine several measures of household debt burden.

A full discussion of the survey findings is available in the January 2003 issue of the Federal Reserve Bulletin. These surveys are conducted every three years and contain data that should interest anyone who markets products and services to consumer. Respondents were asked to provide data for the 12 months preceding the survey. Interviews are primarily in-person and last between 1 and 2 hours, allowing for a detailed inventory of household assets, liabilities, employment history and net worth.

Change in Debt Levels by Family Income and Age

The table below displays median values of total debt holdings (including mortgage debt) for families, by income category and age of the family head, in 1998 and 2001. Nearly every income group increased their total debt holdings, as measured in 2001 dollars. Most of this increase was attributable to higher mortgage debt. Higher debt holdings always raise the issue of whether the burden of servicing that debt has increased as well. It need not as debt levels rise, since the size of the required monthly payment on a household budget is dependent in part on household income and in part on the interest rate. If incomes are rising and/or interest rates on the debt are falling, then debt burden may actually fall even as total indebtedness rises. Of course, these were precisely the conditions that characterized the period between 1998 and 2001.

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The chart titled "Median Ratio of Debt Payments to Family Income" displays what we believe is the best available measure of household debt burden at three points in time. These statistics derive from the Surveys of Consumer Finances in 1995, 1998 and 2001. The chart shows the calculated median ratio of respondents' monthly debt payments to their monthly family income, subdivided by income grouping.

Between 1995 and 1998 these statistics showed debt burden rising across all income groups, but the sharpest increase was for families in the lowest 20 percent of the income distribution. When the 1998 survey results were released there was concern that expanded access to credit may have overburdened lower income borrowers. However, by 2001, this trend had reversed, with all income groups experience a decline in debt burden.

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An additional measure of financial distress confirms that debt burdens eased somewhat between 1998 and 2001. The chart below displays the percent of families with "high" payment to income ratios, that is, ratios in excess of 40 percent. After rising from 1995 to 1998, the proportion of families in each income group with "high" ratios fell by 2001. Of course, this does not mean that there are not families experiencing financial distress because of excessive debt. The proportion of families whose debt service payments exceed 40 percent of monthly income is still over 25% for families in the lowest fifth of the income distribution. But, it does appear that rising incomes, falling interest rates and restructuring of balance sheets has lessened the burden of debt for U.S. households, on average.

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