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Posted by on Dec 12, 2008 in Uncategorized | 0 comments

Consumers Reducing Debt For First Time Ever

Total U.S. household debt decreased in the third quarter for the first time since record-keeping began. Economists and financial advisers have long warned consumers to curb the ever-increasing amounts of debt taken on by U.S. consumers, and with the help of the weakened economy, they may finally be taking that advice.

The Federal Exchange reports that U.S. household debt declined .8% in the third quarter, mostly as a result of the 2.4% decline in mortgage debt. Credit card debt continued to rise, but at a small rate: 1.2%.

Source: The Los Angeles Times

Source: The Los Angeles Times

Economists say that consumers are spending less because the economy has suffered. Though it may seem that the lower amount of debt signals that consumers have become more prudent in their financial behavior, it is unclear what the major causes of this decline in debt originates from. It could be, for example, that people are taking on less debt because it is being imposed on them through foreclosures or denial or credit.

“While it’s good that households are beginning to save, it’s much more likely that this is being imposed on them by the unavailability of credit than any desire to sustain their balance sheets over the long run,” Vincent Reinhart, a former economist for the Federal Exchange who is now a fellow at the American Enterprise Institute, told the Los Angeles Times.

During the same period household net worth also continued to decline because home equities declined. Homeowner’s equity as a percentage of their homes’ values fell to 44.7%. This number has not dipped below 50% since World War II.

“The fact that net worth is going down means that people are feeling poorer and poorer and are cutting back by saving rather than borrowing,” Joe Naroff, president of the Naroff Economic Associates, told the Los Angeles Times.