Monday, August 29, 2016

Household borrowing hit a hard limit four years before the bottom fell out


Take household debt and look at the "change from year ago" values: That's household borrowing, in billions of dollars. That's the blue line.

Take household debt service payments "as a Percent of Disposable Personal Income" and convert it to household debt service payments in billions of dollars. That's the red line.

Look at what happened after the 2001 recession:

Graph #1: Household Borrowing in Billions of Dollars (blue) and
Household Debt Service Payments in Billions of Dollars (red)
Household borrowing (blue) rose sharply until it reached the ceiling set by debt service payments. Then it fell back. This happened in 2003. It happened again in 2004 and again in 2005 and again in 2006. It is as if lenders would lend no more than they could get paid back in a year... or borrowers would borrow no more than they could afford to pay in a year.

In 2007, after the fourth attempt, household borrowing went into free fall. You know what happened after that.

1 comment:

jim said...

As you pointed out the actual amount borrowed is higher than the increase in debt. This was particularly true just before the 2008 crash.
Most of the increased borrowing was being financed by loans funded by private investors through private (non-govt backed) mortgages conduits.

http://si.wsj.net/public/resources/images/BN-DW279_RMBS_G_20140728130506.jpg

What is shocking is the degree to which these loans were being liquidated (i.e. paid off).

From the late 90's to 2007 there were over $5 trillion in home mortgages financed through private mortgage conduits, but by the time this lending channel stopped lending there were less than $2.4 trillion of those loans outstanding. The rest were already liquidated

https://fred.stlouisfed.org/graph/fredgraph.png?g=4t8u

Almost all of rest of the mortgages were paid off either by selling the house (at a profit) or by refinancing based on a new higher appraised value of the house.

I doubt that the prepayment and liquidation of a mortgage counts towards debt service costs. If it it did count there would have been a
huge jump in the debt service cost that was comparable to the increase in debt you see in the years before the crash.