Michael, here is another view of the consumer debt burden:
morganstanley.com
Three factors are relevant for examining that compositional shift. First, over the past two decades, what seems to be credit card debt is partly "convenience credit" that substitutes for cash and incurs no interest. Of course, that reflects growing use of credit cards as a means of payment; the growth of e-commerce, mail and telephone purchasing has accelerated the trend. Whereas in 1990, 90% of consumer credit card receivables incurred interest charges, by 1998, that share plunged to 69%, according to CardWeb.com, and the share probably has declined farther over the past five years. Second, Detroit's captive finance companies offered more favorable terms for vehicle credit, as interest rates declined from 12% in 1990 to an average under 4% today, loan maturities rose above 60 months and loan-to-value ratios rose from 85% to 95%. Finally, a surge in homeownership rates, especially among younger families, has raised aggregate mortgage debt levels in relation to aggregate income. Since 1994, homeownership rates have jumped from 64% to 68.2%, and the rate for the population under 35 years of age has soared 460 basis points to 42%. But the typical homeowner may have no more debt -- and thus no higher debt servicing costs -- than in the past.
Courtesy of declining interest rates, the household debt service burden (including interest payments plus scheduled repayment of principal) has declined from 14.4% at the end of 2001 to 13.99% in March 2003. But the factors just cited likely mean that the Fed's measure overstates that burden. If fewer credit card holders "revolve" than the Fed assumes, the interest portion of the burden will be lower. The surge in homeownership has increased debt burdens, but the Fed's measures don’t allow for the tax deductibility of mortgage interest or for the elimination of rental expense. I estimate that such adjustments would reduce the debt service burden by about 170 basis points to 12.3% in March 2003. |
