Recent Changes to a Measure
of Household Debt Services

The October issue of the Federal Reserve Bulletin contains an article with the title shown above that should interest readers involved in consumer and mortgage credit. The authors are Karen Dynan, Kathleen Johnson, and Karen Pence. The basic premise of the article is that, "when a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services." Households with high debt levels relative to income are also more likely to default on their obligations when they suffer an unexpected misfortune such as job loss or illness. Thus, when household debt ratios are high and unemployment is rising, lenders respond to the expected increase in defaults by limiting the availability of credit. This reaction may further constrain spending.

To broaden the measure of required monthly payments, the Federal Reserve economists have created two new statistical series that provide a more inclusive measure of the impact of households' required monthly payments for goods and services. The revisions reflect basic changes in how consumers finance their spending. For example, an increasing portion of consumers acquires the services of an automobile by leasing instead of buying. Rather than borrow from their bank, credit union, or other lender, more consumers rely on home equity loans.

These and other changes in consumers' financial practices are reflected in the revision of the debt service ratio (DSR). Essentially, the DSR represents the required minimum payments on households' formal monthly payment obligations incurred for a variety of purposes. "The measure expresses the debt service obligations of the population as a whole, not necessarily the obligations of the typical household. FOR (Financial Obligation Ratio) is "a broader measure of household liabilities" that includes recurring obligations such as rent, auto leases, homeowners' insurance and property taxes." Such obligations have not previously been included in measures of consumers' debt burden. Even if there is not a formal written document, as in the case of a utility bill, consumers must still pay these periodic bills. The new statistic is a major and very sensible contribution to our economic database.