4 February 2023

Americans’ Debt-Cutting Levels Off

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U.S. families’ debt burdens have settled at their lowest level in over a decade, putting the economy on a stronger footing relative to global rivals going into 2015. With home values rising, Americans are beginning to borrow more, a development that could help lift spending and juice the U.S. economy.

Total U.S. household debt, when measured as a share of disposable income, has fallen from a peak of 135% in late 2007 to 108% this year through September, according to a Federal Reserve report Thursday. That’s the lowest sustained level since early 2003 and far below levels among households in Britain, Canada and Japan.

Americans’ healthier balance sheets, along with falling unemployment and cheaper gasoline, could boost consumer spending, which accounts for two-thirds of U.S. economic output. Economists say the progress U.S. households have made in reducing their debt burdens—either by paying off debt or just defaulting on loans—is a key reason why the U.S. is now outperforming much of Europe and Japan. While defaults and bankruptcies are painful and hurt consumers’ credit histories, they also speed up the process of repairing household finances.

At the same time, overall household borrowing rose at an annualized 2.7% pace last quarter, up from a 0.6% pace at the end of last year. Mortgage debt expanded by an annualized 0.7%—the first rise since the third quarter of 2013.

Americans’ overall wealth dipped slightly in the third quarter, mostly due to a downturn in stock valuations. The net worth of U.S. households and nonprofit organizations—the value of homes, stocks and other assets minus debts and other liabilities—dropped about $140 billion between July and September to $81.3 trillion. The figures aren’t adjusted for inflation or population growth.

The value of stocks and mutual funds owned by households edged down $700 billion during a quarter when the Standard & Poor’s 500 stock-market index gained only 0.6%. By comparison, the value of residential real estate last quarter grew $245 billion, Fed figures show.

A measure of homeowners’ equity as a share of the value of real estate holdings rose to 53.9% in the third quarter, from 53.6% in the second—a sign Americans are regaining equity in their homes.

While much of the nation’s stock-market gains goes to the wealthy, who tend to save the proceeds, a home is the biggest asset for most Americans.

To be sure, many Americans still aren’t feeling the benefits of the now-five-year-old recovery. Wealth gains, including in the real-estate market, are unevenly spread among Americans of different incomes—not to mention races and ethnicity.

Still, when Americans see home values rising, they are more likely to ramp up their spending.

Click here to access the full article on The Wall Street Journal. 

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