Household Debt Up, Delinquencies Low Since Recession

February 11, 2019
Economist Don Schlagenhauf in studio with Karen Mracek | St. Louis Fed

This 12-minute podcast was released Feb. 11, 2019.

How have household debt levels changed since the Great Recession? Listen to St. Louis Fed economist Don Schlagenhauf as he walks us through his latest research about debt levels and delinquency rates in the Eighth District. He explains the metrics used to look debt in the District’s biggest metropolitan areas. “For right now, delinquencies are not high at all,” Schlagenhauf said about mortgage debt. As for auto loans, he said, “in some parts of our district, delinquency rates have actually declined—they’re negative.”


Karen Mracek: Welcome to the Timely Topics podcast series from the St. Louis Fed. I'm Karen Mracek, your host for this podcast. With me is Don Schlagenhauf, an economist in the St. Louis Fed's research division. Today we'll be talking about his research on household debt. Thank you for joining us today.

Don Schlagenhauf: Thank you for this opportunity.

Mracek: Now Don, you've done research on a variety of topics, but the one we're going to talk about today is relevant to almost anyone who's purchased a car or a house or done some shopping on a credit card. We're going to talk about household debt levels.

Schlagenhauf: Good.

Mracek: So let's just start with some basics about household debt and explain a little bit about what we mean when we say household debt. What exactly are you referring to?

Schlagenhauf: I think when we think about household debt, we want to think about four components: mortgage debt, HELOC debt, credit card debt and auto debt. We're not going to talk about student debt, which is prominent in the news these days, for the reason that there's some data issues and it just brings in issues that we don't want to cover right now.

Mracek: Okay. No problem. And you mentioned HELOC. What is that?

Schlagenhauf: That's when you take the equity in your home and you want to withdraw it and use it for something else.

Mracek: So home equity loans?

Schlagenhauf: Yes.

Mracek: Got it. And we're also not talking about government debt, right?

Schlagenhauf: No government. This is just about the household.

Mracek: Okay. So can you tell me: Why did you want to get into this topic of household debt? Why did it interest you?

Schlagenhauf: Well, there are two reasons. One, before coming to the Fed, I was working a lot on mortgage debt, which is one component—and a large component—of household debt. So it's natural just to go on and say, “Well, when we take on mortgage debt, are we running up our credit card debt at the same time to furnish that house? Or are we buying a new auto?” So there's some relationships there among the various debt categories, so that was probably the major reason we moved onto that area.

Mracek: So let's talk a little bit about how the amount of debt and the composition of the types of debt changes over a person's lifespan.

Schlagenhauf: Yeah. I think we want to start talking about the total first, and then we'll talk about some components. Economists usually like to think about debt over a life cycle with something called the life cycle model. It's very simple.

Let's start with someone who's very young. At a very young age, they enter the labor force, but they're right out of school. They may not get a large income, but that income grows overtime until you retire. When you retire, you could work or we usually say you're not working. So that's kind of the standard income flow. It almost looks like an “S” curve a little bit—it’s low, grows, kind of steadies off after you've got human capital acquired by working on the job.

Now what's happening at the same time is, if we think about it, when we're young, we don't have assets. So if you want to buy that home, what do you have to do? You have to borrow, which means that we have a lot of debt when we're young. Now, hopefully at some point you slow down debt accumulation. You start to pay it off. So by the time you retire, you don't have debt. You have savings. And then you use that saving to live your remaining years. So that's basically the idea behind the life cycle model.

Mracek: Okay. Great. And has that shifted at all, either in the run up to or during the Great Recession?

Schlagenhauf: Yeah. It certainly has. During the Great Recession, what did we see? We saw more debt accumulation. And part of it was a policy response. Homeownership historically since the post-war period is about 64 percent, but there was questions. Can't we get other people, lower income people, into housing? So we changed the debt structure. We changed mortgages to more variable mortgage interest, less down payment, and that created more debt because of household debt.

Mracek: Okay. And we'll get into a few of those things a little bit more, but just to back up a second, we're not saying debt is necessarily bad, then? It helps you buy stuff, a house early on in life, right?

Schlagenhauf: No. Because part of the life cycle model says you want consumption smooth. You don't want to starve with the low income. You don't want to live on the street with a low income. You'd like to live in a house. So what borrowing does is it allows us to smooth consumption over our lifetime, which is what economists say is an optimal response. So that's why borrowing isn't bad. It's only bad if you can't repay it.

Mracek: And that's one of the reasons that you look at the debt to income ratio, right? So you're not just looking at the total amount of debt?

Schlagenhauf: Exactly. The normal ratio that one looks at is the aggregate debt to income, and income could be measured as disposable income or personal income. It doesn't change the results much.

Mracek: On the debt-income ratio, how has that changed over time?

Schlagenhauf: There's been a lot of publicity about what's happening with the debt/income ratio. If we go back to 1980, the debt-income ratio was 0.60, so debt was less than income. Between 1980 and 2007, which happens to be the date about the Great Recession started, the debt-income ratio went up to 1.24, so debt exceeded your income for the U.S.

Mracek: Wow. By quite a bit.

Schlagenhauf: By quite a bit. So what's happening afterwards? By 2010, that debt-income ratio falls to 1.11, still over your income. And if we look at it for the most recent observation, it's actually under one now. It's about 0.96. So it varies, but that's kind of the measure. If you looked at the debt-income ratio back in 2017, 2016, you could see a problem was brewing.

Mracek: And then another thing that you look at is delinquency rates. So what can you tell us about those?

Schlagenhauf: Well, first of all, what is a delinquency rate? Well, if you haven't paid your debt for three months or four months, we look at that number. What is the fraction of delinquencies on debt categories? So the idea is when that's growing, that's a sign there's a debt problem—we have to worry about that. And clearly, if you would have looked at delinquency rates for mortgage debt prior to the Great Recession, the crash, you see they were very high and they were growing, and that told us that there was a problem. So it's not only debt, but if your delinquency rates are going up, and foreclosures are starting to rise, then we have a debt crisis.

Mracek: Okay. And let's just go through some of the debt categories that we talked about at the beginning and talk about the delinquencies and maybe how they compare to either pre-recession or right after the recession. So you talked a little bit about mortgage debt. How do delinquencies fare right now on mortgage debt?

Schlagenhauf: For right now, delinquencies are not high at all. The economy's still doing well, so there's not a real big issue there. The big issue is people aren't buying. That's a different question for a different time.

Mracek: Okay. And what about auto debt, car loans?

Schlagenhauf: Sure. If people think back to 2017, right before Christmas, in the news there was a question: Is there going to be a debt crisis? Because auto debt was going up so much and there was a lot of subprime lending introduced on auto debt. So we monitored that pretty carefully here at the Bank. And what we found is that if you look at the last two quarters of data, auto debt has slowed tremendously. The question then you have to ask me is, what about delinquency rates? They're not high at all.

Mracek: Really?

Schlagenhauf: In some parts of our district, delinquency rates have actually declined—they’re negative. So the bottom line is we don't see any big problem with auto debt.

Mracek: Okay. What about any trends in credit card debt levels or delinquencies that would be critical?

Schlagenhauf: Well credit card debt seems to be very seasonal. As you would expect, smoothing consumption, we want to use credit card debt at Christmas to buy all those gifts for people. But if you think about it and you look at the data, again they seem to be paid off pretty quickly in this economy and delinquency rates are falling around the District. No evidence there's a problem out there.

Mracek: Okay. And then the fourth one you mentioned was home equity loans. What are you seeing there?

Schlagenhauf: Yes. Actually, people are not taking, in this District, money out of their homes and buying things like happened before the Great Recession. So they're actually negative. People are paying off their equity loans now.

Mracek: Don, you mentioned the District. What exactly are you talking about there?

Schlagenhauf: Yeah. St. Louis is known as the Eighth District and it's comprised of Missouri, or at least part of Missouri, Illinois, Arkansas, Mississippi, part of Tennessee, part of Kentucky and part of Indiana.

Mracek: Okay. Great. And in your research, what have you found about household debt levels and delinquencies in our District maybe compared to the nation?

Schlagenhauf: Yeah. I think the thing you want to take away from this is that if we go back to the Great Recession, certainly Missouri and the Eighth District suffered some. We had a downturn, but it didn't compare with what happened in Florida, in the Southeast. It didn't compare with what happened in the Southwest, like Phoenix or Las Vegas. And the reason was why? Well, it's because of that mortgage debt. There wasn't a big spike in home building and mortgage debt like we saw in the southern part of the United States in the Eighth District. That accounts for the difference.

Mracek: So we didn't have to recover as much as some of the other areas?

Schlagenhauf: Yeah. We didn't. The home prices didn't fall as much, we didn't have as many defaults, so the recovery was just easier.

Mracek: That's a good thing. So you mentioned the metro area and part of your research looked at the four largest metro areas of the Fed District: Little Rock, Memphis, Louisville and St. Louis here. And you haven't seen any rising delinquencies or anything that would give you reason to be concerned?

Schlagenhauf: Yeah, no. We looked at the debt categories. We created metrics for the cities by debt category, so we can monitor them and see if there's a problem brewing anywhere in the District and in those MSAs (metropolitan statistical areas). And the answer is there's nothing. And you'd like to see a problem two or three consecutive quarters. Nothing like that's happening. So right now, everything's calm.

Mracek: That's good that we don't see a crisis brewing right now. Are you pretty confident that you'd be able to spot problems maybe before they got out of hand?

Schlagenhauf: I think realistically what we'll have to do with the new metrics we've developed is suppose we see data going up with respect to a debt category. We watch it carefully to see if it's going up two, three quarters in a row. But at the same time, after a number of quarters going up, you want to look and see are the delinquency rates changing? So you need that combination before you're sure, so you're not going to react immediately. You have to see if the facts are coming out and the metrics are saying that there may be a problem and then hopefully we can get some publicity out there.

Mracek: So in terms of household debt, what are some key takeaways or things that you want our listeners to know?

Schlagenhauf: Well, I think first of all, just because you see debt rising doesn't mean it's a bad thing. We have to remember that you want to use debt to smooth out consumption fluctuations. It's just when there's too much debt, there's a problem.

Mracek: All right. Well, thank you, Don, for your insight. You can find more of Don's research online at And thank you to our listeners for tuning into this latest Timely Topics podcast. You can find more of our podcasts at Thanks for joining us.

Economists and experts talk about their research, topics in the news and issues related to the Fed. Views expressed are not necessarily those of the St. Louis Fed or the Federal Reserve System.

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