Despite the growth of purchase volumes, consumer leverage, as estimated by the financial obligations ratio (FOR), which measures debt service payments on mortgage debt, auto debt, consumer debt and property taxes as a percentage of disposable personal income, continued to decline, amounting to 15.27% in fourth-quarter 2014. This compares with a peak FOR of 18.09% recorded in fourth-quarter 2007 and a 35-year average of 16.51%. As interest rates rise, and consumers experience higher debt service burdens.
Fitch Ratings believes the U.S. consumer’s propensity to borrow has declined to some extent following the recent financial crisis, as evidenced by trends in the savings rate and personal leverage ratios. In a positive sign for credit card borrower strength, the personal savings rate in the U.S. is trending higher and is 9 bps above the monthly average rate of 5.7% during 2010-2014.
The Financial Obligations Ratio (FOR) has declined to 15.27%, the lowest measurement since 1981 and the Debt Service Ratio (DSR) has plunged to 9.91%, the second lowest ever recorded in 35 years.
The lower U.S. consumer FOR and DSR is driven primarily by the slowdown in credit card debt with the migration to more debit card use, coupled with low auto loan rates and record low mortgage rates.
According to the Federal Reserve the FOR declined to 15.27% in Q4/14, compared to 15.28% in Q3/14 and 15.43% in Q4/13. The DSR declined to 9.91% in the fourth quarter of this year, compared to 9.92% in the third quarter, and 10.02% one-year ago.
The FOR peaked at 18.09% in the fourth quarter of 2007. While the 15.28% ratio for Q3/14 is the lowest in 34 years, the second lowest was 15.09% in the fourth quarter of 1980.
Since peaking at 13.18% in the fourth quarter of 2007, the beginning of the Great Recession, the DSR has declined steadily since, dipping into single digits for the first time in the fourth quarter of 2012 (9.83%).
Over the past five years as the credit crisis of 2008 subsided, the DSR has declined 123 basis points (bps). Mostly notably the period between 2011 and 2012 when the U.S. economic recovery took hold.
The household DSR is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
The Financial Obligations Ratio is a broader measure than the Debt Service Ratio. It includes rent payments on tenant-occupied property, auto lease payments, homeowners’ insurance, and property tax payments.
U.S. FINANCIAL OBLIGATIONS RATIO
U.S. CONSUMER DEBT SERVICE RATIO
Revolving Consumer Credit Historical
Q4/13: $857.6 billion
Q1/14: $861.5 billion
Q2/14: $875.1 billion
Q3/14: $881.6 billion
Q4/14: $889.0 billion
Source: Federal Reserve
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