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Evolution of Household Finances

In: Financial Markets and Economic Performance

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  • John E. Silvia

Abstract

Both the supply and demand for household credit associated with the housing crisis reflect cognitive biases, such as the recency bias, that drives borrower and lender expectations. Well-intended, but poorly proscribed, financial deregulation offered a field of experimentation that reinforced the housing crisis. Increases in household debt alone, tells us little about the true financial state of the household. A better approach is the comparison of assets/liabilities—the concept of household net worth. Income statement ratios, such as the interest expense to disposable personal income ratio, provide a view of household finance. This introduces the influence of changes in interest rates, credit availability, and the pace of employment/income growth. Since the financial crisis of 2007–2009, the household debt service ratio remains below the level of early 1980s—a structural break in the series intimates a new model of household supply and demand for credit.

Suggested Citation

  • John E. Silvia, 2021. "Evolution of Household Finances," Springer Books, in: Financial Markets and Economic Performance, chapter 0, pages 275-306, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-76295-7_8
    DOI: 10.1007/978-3-030-76295-7_8
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