The share of American households delinquent or in default on their mortgage payments has been increasing for several months. The Wall St. Journal reported yesterday that the same is true for auto loans. The New York Times reported last Friday that food bank use is on the rise.
The proximate cause of these developments is the housing crisis. But there is a longer-term element. We may be embarking on a period in which sour economic turns — an increase in unemployment, a rise in interest rates, a significant jump in gas or food prices — create substantial financial difficulty for a larger share of households than has previously been the case. Why? Because more households have little financial “wiggle room.”
The conventional story attributes this to Americans’ increasing recourse to debt. Household debt has indeed risen sharply in the past two and a half decades; debt as a share of disposable personal income jumped from 70% in the early 1980s to 130% in 2005, according to calculations by Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto of the Economic Policy Institute. Part of this is credit card debt, but the bulk is mortgage debt — a product of rapidly-rising home prices, low interest rates, low-down-payment mortgages, and home equity loans.
The following chart shows the average ratio of debt payments to income for families in the bottom three quintiles of the income distribution. The data are from an analysis of the Survey of Consumer Finances by Federal Reserve economists Brian Bucks, Arthur Kennickell, and Kevin Moore. (The calculations are available beginning in 1989.) For each of these groups, which together comprise 60% of the population, average debt payments have increased. Yet they haven’t exactly skyrocketed.
Debt is by no means the whole story. Equally important are two other developments. First, except for a brief period in the late 1990s, inflation-adjusted earnings for people in the lower half of the distribution have been stagnant since the late 1970s. The next chart shows this.
Second, many two-adult households have offset wage stagnation by sending the second adult into the the labor force. But as Elizabeth Warren and Amelia Warren Tyagi point out in The Two-Income Trap, for a lot of households that option is no longer available. The next chart suggests why. Nearly three-quarters of prime-working-age (25 to 54) women are now employed, up from half in the early 1970s. Thus, many of the households that can have two employed adults already do.
The result? Households now appear to be more sensitive to serious short-run financial strains — job loss, a medical problem that results in significant cost (due to lack of health insurance or inadequate coverage), a hike in rent, a rise in mortgage payments (as a low-interest-rate adjustable mortgage rolls over). A generation ago a household could adjust to this type of event by having the second adult take a temporary job to provide extra income. During the economic boom of the late 1990s they might have been able to switch jobs in order to get a pay increase. In the past ten years they could run up credit card debt or take out a home equity loan.
For many households with moderate or low incomes, these strategies are now foreclosed.
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I’m not sure about the second of your explanations.
You claim that many two-adult households have offset wage stagnation by…
One doesn’t offset stagnation; one offsets decline. If wages have been unchanged, then the situation is no worse than it has been.
…by sending the second adult into the the labor force. But as Elizabeth Warren and Amelia Warren Tyagi point out in The Two-Income Trap, for a lot of households that option is no longer available.
So let me get this straight. Let’s say we have a household with one person holding a full-time job. According to your analysis, if the second person were to get a full-time job, then…the family would become more sensitive to short-run financial constraints. Something is fishy, no?
My answer is that it obviously depends on what is done with the extra money earned by sending the second person to work. For example, if all of it is spent, then the family has the possibility to cut that extra spending during a downturn. On the other hand, if the family uses the extra money to have another child and support him/her, then the family does indeed become more sensitive to financial constraints.
So the fact that more people work cannot be the cause of financial insecurity – it must lie in some other choices/constraints people face these days.
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Does “earnings” consist of wages, or does it also include things benefits and investment income?
Thanks,
Whit
You like to throw out a ton of irrelevant statistics, don’t you? The reason a larger share of Americans are getting behind on their mortgages is twofold:
1. Al larger share of Americans are homeowners.
2. In 2005 and 2006 a huge percentage of the new homeowners added to the total were marginal borrowers using subprime credit.
The current crisis is no different than any other asset bubble: at the last minute, when prices are already too high, the mania begins to sweep the least qualified participants into the market. Then the market runs out of buyers, prices plummet, and the weak hands are the first to break. People are defaulting because they borrowed more than they could afford. That’s a very simple concept and one that most Americans get. Apparently you don’t.
Whit:
The earnings data here do not include employer-provided benefits or investment income.
Lane
Alex ,
what you seem to be forgetting is that cost of living has increased while wages have stayed the same, your reading of both the artical and history is incorrect.
Beth
Lane,
Might benefits and investment income be important items to include this analysis? Perhaps wages haven’t grown much but health benefits have. I’m not asserting this is the case, but it very well maybe. Seems to me the analysis would be improved by including these (though perhaps data is hard to find).
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It’s too bad people are in so much debt. Baby boomer retirement is just around the corner. Now the economy is sputtering.
http://www.longwavepress.com/Baby_Boomers_Generation_X_SCv1a.pdf