Americans Cut Back, Only to Spend Again

Household balance sheets are in their best shape in years | For families, the “deleveraging process is largely over”

Rich Miller, Steve Matthews, and Elizabeth Dexheimer


Anita Bullock-Morley was $57,000 in debt on 27 credit cards and close to filing for bankruptcy in 2007. With help from an Atlanta counseling service, she says she paid about $1,400 a month to clear her credit-card balances. Recently she forked over cash for an $800 iPad and an iPhone upgrade.

Americans are finally getting their finances in order. According to data from the Federal Reserve, household debt as a share of disposable income sank to 113 percent in the second quarter from a record 134 percent in 2007. Debt service payments are the smallest in almost 18 years, while the credit-card delinquency rate is the lowest since late 2008. “The household deleveraging process is largely over,” says Mark Zandi, chief economist at Moody’s Analytics.

This progress will help keep the economy expanding even as the government steps up efforts to cut the deficit, Zandi says. That’s because consumers who have reduced their debt pile will be willing to use credit to make long-deferred purchases. Carmakers stand to benefit, says Brian Johnson, a senior research analyst for Barclays. U.S. vehicle sales rose in September to a seasonally adjusted annualized rate of 14.9 million, the highest since March 2008, according to researcher Autodata.

Household balance sheets have been boosted by a surge in stocks and even a rise in home prices. The Standard & Poor’s 500-stock index has climbed 116 percent since its nadir in March 2009. Home prices jumped in the second quarter by the most in more than six years, according to the S&P/Case-Shiller Home Price Indices. The result: Household net worth as a percentage of income rose to 527 percent in the second quarter from 477 percent in the first three months of 2009.

The Fed’s policy of keeping interest rates near zero is helping Americans put their finances on firmer footing. Taking advantage of record-low mortgage rates, many homeowners are refinancing into shorter-maturity loans so they can pay off their balances faster. Others are freeing up money to spend elsewhere. Cyrus Cousins of Austin, Tex., will cut his monthly debt service costs by about $300 after he refinances into a 3.5 percent mortgage. “A new car is in the mix for my wife,” who drives a 1994 Honda Accord, he says. The savings could contribute to remodeling their 1935 house and help the couple start a family, says Cousins, who works for a coffee wholesaler and retailer.

Some economists, including Harvard University professor Kenneth Rogoff and former Fed official Nathan Sheets, say the deleveraging process still has years to run. While debt as a share of income is down, the second quarter’s 113 percent was above the 94 percent average since 1980. Sheets, who heads international economics at Citigroup, says the ratio probably will fall over “some years” to about 100 percent.

Angela Sasseville, a psychotherapist in Denver, says she and her husband are three years into a “financial turnaround plan” worked out with Community Credit Counseling Services to pay off credit-card debts in the five figures. Says the mother of two: “I do think that folks have to recognize that this is, for a lot of families, not a sprint, it’s a marathon.”

The bottom line Household net worth, at 527 percent of income, is once more robust enough to have consumers thinking about big purchases.


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