Each quarter, the Federal Reserve releases an analysis of the aggregate ability of U.S. households to service their debt. The Fed acknowledges there are limitations in the accuracy of this analysis, due to the difficulty in gathering specific data on each debt obligation of all U.S. households.
One of the indicators measured and released by the Federal Reserve is the debt service ratio or DSR. This figure estimates the ratio of debt payments to disposable income. For this calculation, required mortgage payments are added to other estimated required payments on consumer debt.
Another ratio provided in this analysis expands the debt obligations included in the DSR to include estimates for required payments on additional borrowing such as automobile loans. Other mandatory payments such as homeowner’s insurance, property taxes and certain kinds of rent are included in calculating this financial obligations ratio or FOR.
Of most value from the data provided by the Fed are the trends and comparisons that can be observed over various time frames.
As calculated by the Fed, the overall debt service ratio for U.S. households is at a level not seen for approximately 30 years. The last reported figure is 10.49, after having peaked at more than 14.0 in late 2007. In the early 1990s, the DSR was slightly higher than the current level. Figures in the early 1980s were at approximately the same level as the readings observed the last couple quarters.
Not surprisingly, the current debt service ratio is benefiting from the ultra-low interest rates being manufactured by the Federal Reserve. Additionally, aggregate household debt levels decreased for those homeowners involved in mortgage foreclosures over the past several years.
Reported ratios for the expanded financial obligations ratio demonstrate trends similar to the DSR observations. With the most recent reading of 15.69, the FOR has not been this low since about 1984. In the early 1990s, the Fed’s reported FOR figures approached the current low level.
Relatively inexpensive debt servicing is manifest in these figures measured by the Fed. Very low interest rates appear to be the most significant contributor to these improving debt service measures. As interest rates begin to show signs of increase, many U.S. households will see increases in their required debt service obligations unless aggregate borrowing is decreased.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.