High Home Values Mean High Consumer Debt

Owners of rapidly appreciating homes feel wealthier and therefore are more likely to take on debt, according to research to be released today by the Federal Reserve.

The research paper by Donald L. Kohn, the second-highest ranking Fed official after Ben Bernanke, with assistance by Fed economist Karen E. Kynan, blames the rapid rise in housing prices for soaring consumer debt.

But the authors predict that the increase in debt isn’t likely to be repeated, unless home prices rise as rapidly as they have in the recent past and mortgages continue to be easy to get.

The authors note that the average household owes more money than it makes in annual income. In the early 1980s, the debt-to-income ratio was below 60 percent.

Source: The Wall Street Journal, David Leonhardt (08/20/2007)