Household Income and Debt Trends Since 1980: Quick Picks

The folks who write Credit Slips are among those who have long wondered what the “exit strategy” was for an economy that was predictably on a wobbly course, with about 70% of GDP driven by household spending when many of those households were on kind of shaky ground.  That’s obviously not a sustainable long term strategy for economic growth when, on one hand, the income side of the ledger for a large share of those households was sputtering or stalling, while demands on the expense side from big ticket, basic items like health care and health care financing, education, and housing were growing.  The American household debt burden looks like a more complex problem if you think about the cumulative impact of all of these trends, rather than just thinking “flat screen TV” and stopping there.

In looking at data about these trends, I’ve been struck by the comparisons between the first post-WWII era (roughly the 30-35 years ending in the late 70s – early 80s), and the second one covering the last 30-some years.  Since the current crisis seems likely to serve as the end point to the late 20th century economic era, it’s interesting take a Before and After look at the household account trends.

Income growth:  Through this last period, the income gains have skewed increasingly not just to the top, but to the very tippy-top.  From 1946 – 1976, the average income growth for the “bottom” 90% of households was 92%, compared to 25% for the top 1%.  But from 1976 to 2006, the bottom 90% saw only 10% growth, while for the top 1% it was (wait for it --)  239%. (Sources for this and related figures are cited in the appendix to CRL’s comments to the Fed's then-proposed rules defining unfair and deceptive practices for credit cards.)   For a really cool visual of this uncool trend, take a look at the graphic in Clive Crook’s 2006 Atlantic article called "The Height of Inequality." And while you’re there, the story’s pretty interesting, too.

Savings:  A chart on the "By the Numbers" page on Inequality.org shows that the savings rate roughly doubled from 5% in 1949 to over 11% in 1982.  Since 1982, it looks like a downhill ski slope, and the rate was in negative territory by 2006.

Debt:  The debt-to-disposable income ratio of American households more than doubled from 60% in 1980 to 133% in 2007.  A recent article in the Economist says that household and consumer debt went up from 100% of GDP in 1980 to 173% now.

Sorry I haven't yet collected nice links to specifics on those expense-side demands, except for a recent Washington Post article noting that “college tuition and fees have jumped nearly 440%" since the early 80s, but you get the picture.

Lots of factors went into shaping this picture, not the least of which is just the economic world evolving.  But it wasn’t all out of our hands: we made some public policy decisions that helped. (And yes, personal decisions, including collective decisions that made up private sector policy decisions as well.  Personal responsibility is appropriate for both home and work.)  Now will be a good time to find our way to some better trend lines than these. Yes we can.  You betcha.  (In the spirit of bi-partisanship.)

The Other Underwater Loans: Negative Equity in Auto Finance

On Tuesday Fed Chairman Bernanke announced another installment in the effort to alleviate the  credit crunch in testimony before the House Financial Services Committee. One new tool in the kit is a joint Treasury – Fed facility to lend against “AAA-rated asset-backed securities collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.” 

This got me to wondering what the recent (pre-crunch) state of affairs was with respect to the practice I used to call in consumer education programs “Drive One, Pay for Two” – burying the cost of refinancing the left-over debt on the trade-in vehicle in the new (or new-to-you used) car loan docs. Here’s how that  works:  The value of the trade-in is $8000; balance on the loan for that trade-in is $10,000. That leaves a $2000 deficit that either a) the dealer eats (unlikely), or b) you have to cover with an extra cash down payment as well as the trade, or c) gets rolled into the new car loan. The last option means that you are  essentially refinancing the remaining debt on the car you just sold back to the dealer, along with the price of the new car and whatever add-ons get added on back in the F&I office.

A lot of prospective buyers might decide to wait on that new purchase if they understood that  their new car loan would include left-over balance on the car they don’t own anymore. So a lot of dealers used to (still??) fudge the numbers on the loan papers so the old loan pay-off disappeared. (Don’t even ask about the Truth in Lending rules and issues.) 

What a Surprise, the Ability to Pay Matters on Mortgage Modifications, Too.

Last week the Center for Responsible Lending posted a foreclosure ticker on its web site that counts projected new foreclosure filings as they occur: a new one every 13 seconds in 2009.  That puts it at nearly 276,000 as I write this post.  (You can check out your state’s share on the map.)

Cool as technology is, the figures are as depressing as the slow pace of response to the crisis is puzzling. In a December guest blog,  Tara Twomey lifted the veil on the OCC’s report of disappointing re-default rates on modification.  Professor Alan White’s analysis of remittance reports from loan servicers found that only 35% of modifications reduced the homeowner’s monthly payment, while 20% stayed the same.  The largest share-- 45%--actually increased payments.

Yesterday, Fitch Ratings released a report that says (you heard it here first) "the key to a successful loan modification program is that the modification is sustainable." The modifications with 10-20% increases in principal and interest (P&I) payments had a 49% re-default rate within 6 months, more than double the re-default rate for modifications to a 20% or greater reduction in P&I payment (21%). Imagine that!

The Fitch report notes that payment reduction, at least so far, has a more direct impact on re-default than principal reduction. (They also, though, believe principal reductions that give homeowners equity are also likely to improve sustainability.) Fitch projects a high rate of re-defaults unless servicers start focusing more on – (ahem) – long-term ability to pay.

Seems that we’ve come full circle: Hey, guys, maybe you should think about whether people can make the payments when you originate the loan. Hey, guys, maybe you should think about whether they can make the payments when you try to fix the loan.

Should it really be this hard?

“Shock and Gall” – The Penalty Rates That Might Eat Your Wage Gains.

By now most Credit Slips readers know that new federal credit card unfair and deceptive acts or practices, or “UDAP,” rules will prohibit banks from applying rate hikes to existing balances in most cases.  (The big exception will be where payment is more than 30 days late.)  This is a major improvement – or it will be, in July, 2010 when the rules become effective.

In the meantime, how might the steepest of the rate increases – penalty rates – impact household budgets during the next year of the financial strains that recession brings?

Let’s start with what happened to those budgets during the recovery period after the 9/11 slow-down, from 2002-2006.  For the “bottom 90%” (doesn’t “bottom 90%” ring some warning bells about what’s happened to our middle-class?),  there was an average increase in income of less than $1500 for that whole 4-year period (as calculated by Chye-Ching Huang and Chad Stone at the Center for Budget and Policy Priorities).