This 10-minute podcast was released May 4, 2020.
“How would we know, with hard data, which families would be resilient and which ones would not?” was the question posed by the Federal Reserve Bank of St. Louis’ Center for Household Financial Stability after the economy was abruptly shut down in response to COVID-19. Ray Boshara, an assistant vice president, and Lowell Ricketts, lead analyst, talk with Maria Hasenstab, media relations coordinator at the St. Louis Fed, about which families are the most vulnerable to income shock like COVID-19.
Maria Hasenstab: Welcome to Timely Topics, a podcast series from the St. Louis Fed. I’m your host Maria Hasenstab, and today I’m speaking with two members of the St. Louis Fed’s Center for Household Financial Stability. First we have Lowell Ricketts, who is the lead analyst; and we also have Ray Boshara, an assistant vice president. Thank you both for joining me today.
Ray Boshara: Thank you.
Lowell Ricketts: Thanks for having us, Maria.
Hasenstab: Lowell and Ray, your team regularly puts out a collection of essays called In the Balance, which shares perspectives on household balance sheets. Recently you published an article titled, “Families Most Vulnerable to Income Shock like COVID-19.” Ray, tell me how you decided to do this article and who did you find is the most vulnerable to be affected by income shocks similar to those related to COVID-19?
Boshara: Thank you so much, Maria. You know, when the economy was abruptly, and I’d say rightly, shut down in response to COVID-19, we knew that families with weak balance sheets—you know, not much savings, too much debt, not much wealth in either their homes or retirement accounts—we knew that these families would have an especially hard time economically surviving this profound income shock. But how would we—and I’d say we and policymakers, foundations, nonprofits—how would we know, with hard data, which families would be resilient and which ones would not?
So Lowell and I huddled and he suggested that we look at what’s called serious delinquencies. And that’s defined as those who are two months or more behind on a current debt obligation, such as your car payment or your mortgage or something like that. And, you know, understanding who is seriously delinquent is really kind of a barometer of one’s financial resilience or their financial health. So that’s what we did.
And Lowell will say more, but we found that the most vulnerable families had two characteristics. One, they had very little of what we would call safe or liquid assets like cash and savings. And two, they had high debt-to-income ratios.
Hasenstab: Well, thanks, Ray. That’s really interesting. Lowell, you wrote that households lacking at least two months’ income in safe or liquid assets and those with that high debt-to-income ratio that Ray mentioned, those are the people who face the greatest risk of serious delinquency. Tell me more about how you came to that determination of households and what that risk of serious delinquency can mean to those households.
Ricketts: Sure. Thanks, Maria. That’s a great question. So our analysis for this research brief is based on the experiences of families that responded to the Federal Reserve Board of Governors Survey of Consumer Finances, really the gold standard of looking at what households own, what they owe, and what they earn. And specifically, these are families that over the course of 1989 to 2016 have responded to the survey.
We used a statistical method, which allows us to understand how household finances and many different aspects of it are related to outcomes such as serious delinquency, which Ray defined as two months or more of falling behind on making payments on obligations.
So moving beyond the numbers, though, I think this risk captures a financial fragility that is very different for households to endure. And given the economic effects of the pandemic, we’re worried that more households are likely to experience this particular hardship.
Hasenstab: So on the other side, you said that families with convertible wealth, such as home equity, are less likely to fall seriously behind on debt obligation during this economic shock related to COVID-19. According to your research, who is less likely to fall behind financially?
Ricketts: That’s exactly right, Maria. Having other forms of assets separate from what might be readily available in a checking or savings account—those are assets we often refer to as safe or liquid—having other assets was also associated with a lower likelihood of delinquency. So these other types of assets include home equity, as you said, but they also include retirement accounts, such as an IRA or a 401(k), or equities in the stock market.
And we can only speculate—because we don’t actually watch how these households use these assets—but we speculate that these types of assets can be drawn on in an emergency, such as an income shock, despite some of the penalties that might apply for early withdrawals or something like that.
Additionally, families that had attained higher levels of education, such as a four-year college degree, as well as older Americans, those age 62 and above, were also less likely to fall behind on making payments.
Hasenstab: Lowell, that’s really interesting. Your research found that race and ethnicity matter in predicting serious delinquency, but it’s a complicated relationship. Can you talk to me about those findings?
Ricketts: Sure. It really is a complex issue, both in this research paper but in others that we’ve worked on as a center. And when looking at the raw gaps, Hispanic and black families were more likely to fall seriously delinquent than white families.
However, after we account for the other factors we just talked about, Hispanic families were actually less likely than a comparable white family to fall behind. In contrast, the average black family was still more likely to be delinquent, although less so than in the raw gaps.
So this really begs that question: Why were the risk factors so different between Hispanic and black families? And we cannot say for sure, but it’s likely other factors, as well as, “unobservable characteristics,” may help explain the remaining risk of delinquency among black households. And those include characteristics related to race and ethnicity not captured or really impossible to capture by the survey we use. And these include the legacy of slavery, historical discrimination and exclusionary asset policies such as redlining.
Hasenstab: Wow. Those are some complicated topics that you’re saying can be tied to how some households are reacting to this economic shock. Ray, what would you like listeners of this podcast and readers of your In the Balance article to take away from your research at this time?
Boshara: Yeah. Thanks, Maria. I’d say, three things. First, as our center has extensively documented, weak balance sheets really were a widespread problem before the pandemic. Like so many other things in our nation, I think COVID-19 has quickly and starkly exposed these financial fragilities across the U.S.
And I’d really like to emphasize here, Maria, that, you know, this research isn’t an academic exercise. You know, families may or may not eat. They may or may not stay in their houses or apartments. They may or may not get the health care they need. They may not be able to keep their cars, depending on whether they have some kind of savings and wealth buffer. All right. This is really important. These buffers really matter. For some families, it’s whether they eat or not. It’s life or death for some families, the healthcare they need. So it’s really important to understand that there was a lot of fragility before the pandemic, the pandemic has made it worse, and that not having this wealth buffer really matters for your lives.
The second point I wanted to make is that there’s going to be a lot of work to make families whole again, a term our president, Jim Bullard, has used, both to help the economy and families recover from the pandemic. Millions of families, as we have shown in other research, have yet a decade later to fully recover from the Great Recession, and then COVID-19 comes along and sets them back even further. So let’s hope that we don’t have to keep learning and relearning this lesson that you should build buffers before you need them.
So, you know, we would really like policymakers and foundations and nonprofits and others to really be proactive in helping families build up their savings and their wealth and their resilience. You know, just like we’ve painfully learned with public health, it’s far better to be prepared.
And then my third point here is that having wealth isn’t just a buffer, but it’s also a springboard to really the American dream. You know, families that have wealth are far more likely to send themselves and their kids to college, to buy a first home, to start a business, to save for retirement and pass on wealth to future generations. So wealth really has these two critical functions. One is resilience, and the other I’d say is opportunity. So proactively helping families rebuild their wealth following the pandemic will both serve as a future buffer, but also a springboard to more opportunity down the road.
Hasenstab: Ray, thank you for those powerful takeaways. Ray and Lowell, I want to thank you both for your time today.
Boshara: You’re welcome. Thank you.
Ricketts: Thank you, Maria.
Hasenstab: For more from Lowell and Ray’s article, please visit www.stlouisfed.org/publications/in-the-balance.And for more Timely Topics podcast episodes, visit stlouisfed.org/timely-topics. You can also subscribe to our Timely Topics podcast series on Apple Podcast, Stitcher and Spotify. Thank you.