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U.S. Consumers: Stronger Than You Think

At the World Economic Forum in Davos, Switzerland, this week, a presenter that Bloomberg called a "lonely analyst" predicted we're in for another major financial crisis in 2015.

His prediction boils down to this: Nothing has changed since the last crisis. "The fundamentals haven't been addressed at all," he said.

While the analyst, Barrie Wilkinson, focused on monetary policy and trade imbalances, the "nothing has changed" idea caught my attention. He's right that plenty hasn't been addressed. Bank regulation. Too big to fail. That's all still a mess. But if the financial crisis was caused by excessive consumer debt -- and hard to say it wasn't at least partially -- then the nothing-has-changed attitude falls flat. Truth is, consumers have cleaned up their acts considerably over the past three years.

Consider this:

Source: Federal Reserve.

Household debt as a percentage of disposable (after-tax) income has fallen back to the same level it was at in the early '90s -- or even the mid-'80s. Today's level is well below the 30-year average. Hard to say nothing has changed with those kind of numbers.

Two years ago, I didn't think such a massive turnaround was feasible. Reducing debt levels meant paying the stuff off -- something I figured would take years and years to accomplish at prevailing savings rates. Turns out that was wrong. Debt levels fell abruptly over the past two years because banks started writing it off as fast as they could -- faster, in fact, than consumers could reaccumulate it. This is an odd way to achieve deleveraging, but in the end it doesn't matter whether debt is falling because consumers are paying it off or because banks are forgiving it. The fact is we have less debt today than we did three years ago.

And let's give credit where credit is due. The personal savings rate has come roaring back:

Source: Federal Reserve.

Note the two spikes in 2008 and 2009. Those are temporary blips from one-time stimulus rebate checks. Ignore them. What's important is that the savings rate is now above the typical rate over the long run, and it's roughly six times higher today than it was five years ago. People are saving money again. Quite a bit of it. There's a good chance they'll save at even higher rates in the years ahead as pre-retirement baby boomers hunker down in their final working years. Be thankful for this. It's reversing two major contributors of the financial crisis: reliance on phantom home equity for financial wealth, and a mindset of living above one's means.

Speaking of relying on home equity for wealth, I don't think most realize the importance of this chart:

Source: Federal Reserve.

The rate of homeownership has almost completely reversed its climb to insanity last decade -- a time when anyone with a central nervous system and a signature could own real estate. I'm always aghast at the number of politicians who regard this as a bad thing. Declining homeownership is one of the single best metrics to measure our progress in burying the housing bubble.

We're now moving back to a rational world where those who can reasonably afford to own a home, can, and those who cannot, rent. That's how it should be. Odds are the homeownership rate still needs to come down to flush out lingering excess, but it's clear we're moving in the right direction. And fast.

Finally, there's this news from The Washington Post: "In the fourth quarter, 46 percent of borrowers who refinanced their primary mortgages brought cash to settlement to lower the balance on their loans." That was an all-time record, and the exact opposite of what went down circa 2003 to 2007, when refinancing was largely a way to cash out and draw down equity.

Is there still work to do? Sure. Are consumers as healthy and protected as they need to be? For many, no. But the current state of personal finances versus the swamp many drowned in three year ago isn't even comparable. Plenty has changed -- and for the better.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (18)

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  • Report this Comment On February 04, 2011, at 5:11 PM, xetn wrote:

    "Declining homeownership is one of the single best metrics to measure our progress in burying the housing bubble."

    Perhaps this is the reason for the decline:

  • Report this Comment On February 05, 2011, at 10:30 AM, FutureMonkey wrote:

    I don't know Morgan. Normally I'm in line with your arguments, but this time I'm skeptical.

    I don't think we have created anything like the generational frugality observed after the 1930's that resulted in a financially sound mindset for the nation. At least it remains to be seen if American households are actually engaging in better habits than before the 2008 recession.

    Housing is still a major drain on both the broader economy and our sense of wealth. I think we have much further to go before the housing market stabilizes and the blood gets washed off the street.

    I'm not overly impressed by owner occupation change from 67% to 69% back to 67% over 10 year period as being either "insanity" nor restoration of sanity.

    More importantly I think the aggregate numbers hide the reality on the ground. Total nationwide homeownership is much less interesting than a tighter focus on where the shifts are occuring (both geographically and socio-economically), investment property, speculative real-estate, vacancy rates, an new home starts.

    I am encouraged by restoration of lending standards towards plain vanilla 80/20 30-yr mortgages. I'd like to see people sticking to the idea of not borrowing more than 2x annual household income for mortgage and having 6 months household costs saved before entering into a mortgage.

    I'd also like to dispense with home equity loans for things other than property upgrades or education, vs say vacation and life-style.

  • Report this Comment On February 06, 2011, at 5:25 PM, Blueman1000 wrote:

    It's not a matter of "declining homeownership" so much as "stable homeownership" and that's the key, otherwise you have more of this boom to bust. This guy Morgan Housel is on point.

  • Report this Comment On February 07, 2011, at 1:42 AM, Computergeeksta wrote:

    its not a surprise that personal savings has gone up. if people are "foreclosing" on homes, they aren't paying any cash for rent. They virtually get to live rent free, do not need to pay property tax, or insurance. I'm counting the days to see how long my neighbor can stay rent free before the family is finally evicted. If I didn't have to pay mortgage or property tax, that's alot of cash I would be saving from my households monthly expense.

  • Report this Comment On February 07, 2011, at 1:46 AM, Computergeeksta wrote:

    If home prices are currently priced lower than they have been in years from bank owned properties (usually selling below market value), homeownership rates should be trending upwards!!!

    Maybe the title of the article should be revised "US Consumers: Weaker than you think."

  • Report this Comment On February 07, 2011, at 11:43 AM, maximusdesimus wrote:


    I enjoy your articles and think they are timely and on point. I don't pretend to have great economic knowledge, so maybe someone can help me here. Does the "Household Debt as a Percentage of Income" ratio include mortgage debt? And is this aggregate debt over aggregate disposable income?

  • Report this Comment On February 08, 2011, at 7:37 AM, TMFBent wrote:


    I have been making similar accusations about American consumers for the past couple months on the radio show, but with less thorough research than you usually bring. (Showoff...)

    I was bearish on consumers before that was cool, and now, being bullish on them is still not cool. Let's hope lightning strikes twice.

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