WASHINGTON (Reuters) - A measure of the burden of household debt tumbled in the third quarter to its lowest level in 29 years, which should help free up money for consumer spending and support the economy.
The household debt service ratio -- an estimate of the share of debt payments to disposable personal income -- fell to 10.61 percent from 10.72 percent in the second quarter, the Federal Reserve said on Thursday.
It was the lowest level since the fourth quarter of 1983.
“Consumers have more money in their pockets to spend, which should be positive for the economic recovery going forward,” said Gennadiy Goldberg, an economist at TD Securities in New York.
Households built up a massive debt load as the housing bubble expanded and efforts to pay down those debts have been a restraint on spending and the economy’s recovery.
The debt service ratio, which takes into account outstanding mortgage and consumer debt, peaked in the third quarter of 2007, shortly before the economy tipped into recession.
The Fed has sought to help consumers dig out by keeping interest rates near record lows. It has held overnight rates near zero since December 2008 and has bought around $2.4 trillion in bonds to further lower borrowing costs.
Even though households are now in better shape, analysts caution that consumer spending could stall if Congress fails to prevent higher taxes from taking hold next year.
An even broader measure of financial obligations that includes automobile lease payments and the cost of renting a home also fell in the third quarter, dropping to 15.74 percent of disposable income -- the lowest level since the first quarter of 1984.
That drop reflected an easier burden for homeowners as mortgage debt payments dropped to 8.90 percent of disposable income in the third quarter, the lowest in 11 years.
Both the overall homeowners measure and separate mortgage gauge peaked in the third quarter of 2007.
“You have a lot of people refinancing their mortgages at lower rates,” Goldberg said.
In contrast, the relative cost of rent rose to its highest level since the first quarter of 2010.
The weak housing market has led Americans away from home ownership and toward renting, pushing up rents. At the same time, a modest economic recovery has encouraged some people who had moved in with family and friends to seek their own lodgings, further strengthening the rental market.
While a lightening of household debt burden puts the recovery on firmer ground, it also highlights a hesitance to take on new debt, which could be an obstacle to spending.
“We all (would) like to see better growth in credit, banks being more willing to make more loans to consumers, demand for loans rising,” said Omair Sharif, an economist at RBS in Stamford, Connecticut.
“That would push the ratio higher, but that’s not necessarily a such a bad thing, especially if rates are so low and you are able to service that debt.”
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Dan Grebler