Tracking and Stress-Testing U.S. Household Leverage

29 Pages Posted: 8 Oct 2018

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Benedict Guttman-Kenney

University of Chicago - Booth School of Business

Andrew Haughwout

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: September 2018

Abstract

Housing equity is an important component of borrowers’ wealth and a critical determinant of their vulnerability to shocks. In this article, the authors use a unique, newly created data set to analyze the evolution of household leverage—defined here as the ratio of housing debt to housing values—over time and across locations in the United States, at the micro level. They find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, and rose very quickly through 2012, in spite of reductions in housing debt. As of early 2017, leverage statistics were falling back toward their pre-crisis levels, reflecting a more than 30 percent increase in home prices nationally since 2012. Using borrower-level leverage measures and another unique feature of the data—updated borrower credit scores—the authors conduct “stress tests” in which they project leverage and defaults under various adverse house price scenarios. They find that while the riskiness of the household sector has declined significantly since 2012, when home prices were at their low, the sector remains vulnerable to very severe declines in house prices.

Keywords: mortgages, leverage, stress testing

JEL Classification: D14, E27, G21

Suggested Citation

Fuster, Andreas and Guttman-Kenney, Benedict and Haughwout, Andrew F., Tracking and Stress-Testing U.S. Household Leverage (September 2018). Economic Policy Review, Issue 24-1, pp. 35-63, 2018, Available at SSRN: https://ssrn.com/abstract=3256368 or http://dx.doi.org/10.2139/ssrn.3256368

Andreas Fuster

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Benedict Guttman-Kenney

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Andrew F. Haughwout (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-2685 (Phone)
212-720-1844 (Fax)

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