Monday, August 17, 2009

Household Debt to Net Worth Ratio Spiking

Below we take a look at household debt, net worth, and the subsequent household debt to net worth ratio (think of it as an analogy to a company's debt / equity ratio). What we've seen is a large decline in household net worth, but unfortunately we haven't seen a corresponding decline in household debt.

As a result, the debt to net worth ratio has risen from about 17% in 2006, to 25% by the end of 2008.

But of course, that's not the whole story. Looking at the most recent data (hat tip Zero Hedge) from 2007, we see that the above debt to net worth ratio is significantly higher for the lower and middle class who have saddled themselves with debt in recent years (the lower level for the lower class tends to be smaller as the lowest percentile do not have much / any debt, as they typically do not have access to financing).

That said, the lower and middle class had debt in the range of 30-40% of their net worth in 2007, as compared to the 20% average for all individuals as of that date. The upper 10-percentile had debt at an average of only 10% of their net worth.

So where does this currently stand? While the richest were impacted the most in $$ terms, the lower to middle class tend to have more of their net worth stashed in real estate (i.e. their home). Thus, while the financial markets rebounded in 2009, it is likely that the lower to middle class didn't reap the reward (housing has continued to fall). Thus, when data is updated for 2008 and 2009 (though too early to judge where we'll end up this year), expect the discrepency to be even wider.

Source: Federal Reserve (hat tip reader Bryan Keller) / Zero Hedge


  1. Jake,

    I've long felt that income distribution was one our our biggest problems.

    The top 1/2 of 1% of wealth holders dramatically skew the numbers. Many in the 90th to 95th percentiles are on the edge due to housing and stock losses. Many in this group have very high fixed costs - mortgages, taxes, tuition, clubs, etc.

    In Northern NJ, I know of three very high end golf clubs that have drastically reduced the equity initiation fees. Two even allowed people to join for the season with no initiation just to get the yearly dues.

    What good is output if it keeps accruing to fewer and fewer?

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  3. Jake,
    Some colleagues of mine and I were having an office debate about the state of consumer deleveraging. I pulled some data together and put together a little analysis at:
    and would love your insight.
    The way I see it, is that the published personal savings rate data is useless; if savings rates had always been positive, as the government reports, then where did all the household debt come from. As far as I can tell, though personal savings have gone up, if you look at it on a realistic basis, by only considering usable/spendable/savable sources of income, the true savings rate remains solidly negative (and any decline in debt levels has either been attained by forgiveness, walking away, paying off from asset liquidations, or some combination thereof.
    But I fear I'm missing something. In particular, if I ignore supplemental benefits from disposable personal income, might there be a component of PCE I should extract/pull out as well (that corresponds to health insurance benefit receipts, for example)?
    Any thoughts you have would be fantastic.

    p.s. if I am on the right track with this, I'd love to get the info out there in the blogosphere, so feel free to use it or replicate it


    Mark W
    Guelph, Ontario

  4. Mark-

    Very interesting stuff, but you already did all the hard work!

    I'll see what I can come up with...