Is a Household Debt Overhang Holding Back Consumption?

45 Pages Posted: 21 Aug 2012

See all articles by Karen E. Dynan

Karen E. Dynan

Harvard University; Peterson Institute for International Economics

Date Written: August 20, 2012


The recent plunge in U.S. home prices left many households that had borrowed voraciously during the credit boom highly leveraged, with very high levels of debt relative to the value of their assets. Analysts often assert that this “debt overhang” created a need for household deleveraging that, in turn, has been depressing consumer spending and impeding the economic recovery. This paper uses household-level data to examine this hypothesis. I find that highly leveraged homeowners had larger declines in spending between 2007 and 2009 than other homeowners, despite having smaller changes in net worth, suggesting that their leverage weighed on consumption above and beyond what would have been predicted by wealth effects alone. Results from regressions that control for wealth effects and other factors support the view that excessive leverage has contributed to the weakness in consumption. I also show that U.S. households, on the whole, have made limited progress in reducing leverage over the past few years. It may take many years for some households to reduce their leverage to precrisis norms. Thus, the effects of deleveraging may persist for some time to come.

Keywords: Household debt, household balance sheets, consumption, leverage

JEL Classification: B22, C23, D12, E21, E51

Suggested Citation

Dynan, Karen E., Is a Household Debt Overhang Holding Back Consumption? (August 20, 2012). Brookings Papers on Economic Activity, Forthcoming, Available at SSRN: or

Karen E. Dynan (Contact Author)

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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