Published: May 11, 2006 8:42 p.m. ET


Report: Steeply higher mortgages and school loans squeeze U.S. households



SAN FRANCISCO (MarketWatch) -- Americans' debt levels are rising, but not because we can't resist charging the latest plasma television to our credit card, according to a new report.

Instead, consumers' debt burden jumped higher in recent years because wages grew slowly even as costs increased on items that most of us don't consider frivolous, such as mortgages, health insurance and college tuition, according to a study by the Center for American Progress, a liberal think-tank, in Washington, D.C.

Middle-income families felt squeezed more than most, devoting a median 20% of their income to debt payments in 2004 - even at a time of low interest rates -- up from 18% in 2001. U.S. households overall spent a median 18.3% of income on debt payments in 2004, up from 16.9% in 2001, according to the report, which is based largely on data from the Federal Reserve Board's Survey of Consumer Finances.

And more families entered the group of seriously indebted: 13.7% of households faced debt payments greater than 40% percent of their income in 2004, up from 12.8% in 2001.

Looking at households' overall debt load, Americans' debt rose to a median 108% of income in 2004, up from 78% of income in 2001, with middle-income people facing the steepest rise, to a median 114% of income from 80% in 2001, according to the report.

"The middle-class squeeze [is driven by] stagnant income growth in the face of very sharp price increases for big-ticket items such as homes and education," said Christian Weller, author of the report and a senior economist with the Center for American Progress.

Weller doesn't discount the fact that some people's debt is due more to a lust for consumer goods than an investment in the future by buying a home or education.

"People do buy plasma screen TVs when they can't afford it," he said.

But that's "just a small part of the overall story. All of those consumer credit items are dwarfed by education loans or home loans," he said.

"You'd have to buy a ton of plasma screen TVs to come to the same result that you see from rising home loans and education loans," he said.

Mortgage, education debt on the rise

U.S. households owed a median of $7,800 in education loans in 2004, up 26% from $6,178 in 2001, while the median mortgage loan amount rose to $96,000 in 2004, up almost 24% from $77,752 in 2001, according to the report. See the full report.

In the 1970s, a typical family was spending about half of earnings on big fixed expenses, including mortgage payments, health care and taxes, said Elizabeth Warren, a professor at Harvard University, on a teleconference call with Weller to announce the report.

"A generation later, the two-income family is making much more money but that money is divided differently," she said. "Seventy-five percent of what they jointly bring home now is committed" to those same expenses. "Today's two-income family doesn't need 52 paychecks to make the mortgage payment. It needs 104 paychecks to make the mortgage payment. If either mom or dad gets laid off, they're out of luck," she said.

Another view: Signs of growth

Plus, U.S. households' debt has ramifications for the overall economy, Weller said, noting that as interest rates rise, consumption will slow down. As a remedy, he suggests public policy changes, such as higher minimum wage levels, greater access to tax benefits such as the Earned Income Tax Credit, plus health-care system changes to lower costs.

Still, other economists view indebtedness differently: Their take is that people choose to go into debt, it's difficult to know exactly what drives that choice, and the same statistics that point to steep debt -- such as higher mortgage-loan amounts -- also imply economic success.

"A fact is that homeownership in the U.S. right now is at an all-time high. That suggests it's gotten easier for people to afford their houses," said Russ Roberts, a professor of economics at George Mason University, in Fairfax, Va.

"We're borrowing more for housing than we did before," Roberts said. "Is that good or bad? It's bad if you can't finance the rest of your life after you've done that. The question would be why do people do it?" he said. "One interpretation of that is things are good because we can afford bigger houses and more expensive houses than we did before."

While Weller, the report's author, says more homeowners would buy smaller, cheaper houses if such houses were available near their workplaces, Roberts suggests consumer demand is driving a trend toward bigger homes.

"The size of the house, the number of bedrooms, those are all up over the last 20 years for sure. This would suggest this is not a function of economic hardship but economic success," Roberts said.

He has a similar take on college costs. "Right now, the proportion of college-age people in college is at an all-time high," he said. "Is that a crisis or is that a good thing? It means we're wealthy enough as a nation to have enough money that more people can afford to go to college than ever before," he said.

And, he says, rising costs, whether for college loans or anything else, are offset by lower costs for other goods. "Increasing one cost and holding everything else constant means it's gotten more costly, but you can't hold everything else constant. Many things have gotten cheaper," Roberts said, pointing to electronic consumer goods, and services such as telephone calls.

"People have choices. They're not pleasant sometimes. If you choose to spend more on your house and your income hasn't changed, you're going to have to take fewer vacations, work harder, take a second job, go without, buy a new car less often, and of course people do that very often."

For her part, Warren, the Harvard professor, says public policy changes are important, but individuals also need to consider their choices.

For instance, "large fixed expenses should not be more than 50% of your income. If you live in an area where you feel you must go heavy in housing, then you've got to cut back in all other fixed expenses. High mortgage payment? Drive a clunker and take public transportation. Get by on one car," she said.

Still, "there are forces bearing down on middle-class families that require them to make choices that many of us would find unacceptable, and we need to have some vision of that when we make public policy choices," she said, noting that some people decide to not purchase health insurance because they can't afford it.

"What it took to survive in the middle class in the 1970s is simply not adequate today."


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