4. High Levels of Household Debt

Economically vulnerable families generally had higher balance-sheet leverage, which meant that any decline in the value of their assets was multiplied into a proportionately larger decline in the family's net worth (Figures 4 and 5). A high concentration in housing need not lead to financial distress in a housing market crash if the owner has sufficient net assets (including homeowners' equity) and sufficient cash flow after debt service to meet other needs. If the owner doesn't have sufficient assets or cash flow, however, the family may default on its debts, losing a house, a car and access to additional credit on good terms.

The SCF data reveal that economically vulnerable families often financed their housing investments in a risky way with lots of debt and little margin for error. That is, among the subgroups we consider, those who are economically most vulnerable have, on average, the highest concentrations in housing and the most debt, whether it is measured against assets or income.

Figure 4 shows that younger and less-educated white and Asian families tended to have higher debt-to-asset ratios in 2007 than older and better-educated families. (A similar pattern existed for debt-to-income ratios.) It appears that relative youth is the strongest influence on average debt ratios, while the effect of educational attainment is not as strong or clear-cut.

The dominant influence of age on balance-sheet leverage is evident also in Figure 5, which depicts debt-to-asset ratios for nine black and Hispanic subgroups. Educational attainment also may matter, as the debt ratios of all dropout groups were higher than those of college-graduate groups of the same age. Comparing Figures 4 and 5, race or ethnicity also emerges as a powerful predictor of debt ratios, as every black or Hispanic subgroup had more debt than the corresponding white or Asian group. Illustrating the point made above, historically disadvantaged minority families tended to finance their assets with more debt than did white and Asian families, which amplified the effects of high housing concentrations on net-worth declines during the crisis.

Figure 4

Ratio of Total Debt to Total Assets in 2007 among Whites and Asians


SOURCE: Fed's Survey of Consumer Finances, 2007.

Figure 5

Ratio of Total Debt to Total Assets in 2007 among African-Americans and Hispanics


SOURCE: Fed's Survey of Consumer Finances, 2007.