From The Agonist:

It’s been awhile since I have written about the issue of consumer debt. Please don-t take this as a sign that consumer debt in the US is not an issue anymore. Far from it - the consumer debt issue is still alive and well. In fact, it’s reaching historic levels - as in levels not seen since WWII levels. Paul Kasriel of Northern Trust has done some digging into the most recent Federal Reserve’s Flow of Funds report and found some pretty scary developments. The report is available in PDF format here, under the title Festivus Flow-of-Funds Stocking Stuffers. I would encourage everyone to download this report. The excerpts below reference some of the charts in the report.

Despite the fact that household mortgage borrowing has slowed in recent quarters, the leverage in owner-occupied real estate reached a record high 46.4% in the third quarter of 2006, as shown in chart 8. If mortgage borrowing slowed, why the increase in leverage? Because, as shown in chart 9, there has been a sharp slowdown in the growth of the total market value of residential read estate. With a still sizeable excess inventory of homes for sale, continued weak growth, perhaps even a contraction, in the market value of residential real estate could reasonably be expected in 2007.

Household liquidity fell to a post-WWII low in the third quarter of 2006. I am using as a measure of liquidity household deposits and money market mutual funds as a percent of total household liabilities. Some might respond that with all the different sources of credit available to households today, they do not need to hold as large a ratio of liquid assets as in the past. To this I would respond with three counter-arguments. Firstly, households already have borrowed so much that their level is at a post-WWII high (see chart 13). Secondly, households have already borrowed so much that their debt service burden is at a 25-year high (see chart 14). And thirdly, residential real estate which accounts for 30.5% of the total market value of households assets (see chart 15), is the single largest asset in households portfolios compared with deposits, credit market instruments, corporate equities and other tangible assets. Of these other asset categories,, residential real estate probably is the least liquid. In sum, household have never been as highly leveraged as they are now or as illiquid as they are now, and their single largest asset is in danger of actually falling in value.

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