The Balance Sheets of Low-Income Households: What We Know about Their Assets and Liabilities. Debt Holdings

11/01/2007

Understanding the patterns of asset holdings among low-income families and relating them to their patterns of debt holding is key to developing sound asset policies. An important consideration is the holding of both secure debt, that is, debt linked to an asset such as a home, and unsecured debt, such as credit card balances. If a family buys a house, the house is considered an asset but the mortgage they must pay is considered a debt. However, the debt is secure if the house has a value equal to or greater than the debt. Families usually incur unsecured debts when their current consumption exceeds current available income.

Debts that families hold include home-secured debt (mortgages), secured debt on other residential property, installment loans,[5] credit card balances, lines of credit (other than home equity), and other borrowing that includes loans against insurance policies, loans against pension accounts, borrowing against margin accounts, and a residual category for all loans not explicitly referenced elsewhere.

Debts, like assets, display a life-cycle pattern, tending to first rise and then decline with age; the cycle may be driven by the acquisition of a home mortgage and its gradual amortization (exhibit 8). Exhibits 8 and 9 describe the distribution of debt in total and by select types of debt. The likelihood of holding any debt  as well as the median debt holding  actually tends to be higher for families with more income, headed by persons who are married or cohabiting, better educated, or in the 3554 age ranges. While families who are in the lower-income quintiles, headed by persons who are single or without a college degree are less likely to have debt, they are more likely to have unsecured debts, like installment loans and/or credit card debts, than secured debt, like home mortgages. The differences observed by race and ethnicity are in the same direction but attenuated. (See Appendix exhibit 3 for the data that underlie the exhibits on debts and debt holdings.)

Exhibit 8.
Percentage of Families Holding and Total Median Value
of Select Debts by Family Characteristic, 2004

(in thousands of 2004 dollars)

Exhibit 8.  Percentage of Families Holding and Total Median Value of Select Debts by Family Characteristic, 2004. See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) and Urban Institute tabulations using the 2004 Survey of Consumer Finances.
Note: Breakout of income quintiles: Q1: <$18,000; Q2: $18,000-$31,999; Q3: $32,000-$51,999; Q4: $52,000-$85,999; Q5: >85,999.

Exhibit 9.
Percentage of Families Holding and Total Median Value
of Select Debts by Family Characteristic, 2004

(in thousands of 2004 dollars)

Exhibit 9.  Percentage of Families Holding and Total Median Value of Select Debts by Family Characteristic, 2004. See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) and Urban Institute tabulations using the 2004 Survey of Consumer Finances.

Home-secured debt dominates median debt values across all classifiers (income, education, age, race or ethnicity, family structure) except, as would be expected, for housing status.[6] Since by definition, renters do not have home-secured debt, there is substantial difference in the amount of debt holding between renters and owners. Renters hold a median total (any) debt value of just $7,800, while homeowners hold a median debt of $95,800. Levels of debt holdings rise steadily with education ($12,000 for families headed by persons without a high school diploma compared with $107,200 for families headed by college graduates), by income ($7,000 for the bottom quintile, $44,700 for the third quintile, and $172,500 for the top quintile), and are much lower for single families ($24,000) than for married or cohabiting families ($86,000).

The data also show that the median level of credit card or installment loan debt is not necessarily higher (and is often lower) for typically lower-income families (e.g., singles, renters, headed by nonwhite or Hispanic, less educated, younger) than for other groups  but lower-income families are more likely to hold these forms of debt rather than secured debt. The more specific question then, for low-income families, is how debt levels compare with income on hand to service this debt. This is discussed in the section on debt burdens below.

How do family assets compare with their debts at the median? Exhibit 10 compares median asset holdings side-by-side with median debt holdings, across classifiers. (These data also appear in Appendix exhibit 5). Generally, debts are less than assets but proportional. Owning or not owning a home likely drives these results  the asset value of a home and the debt value of the accompanying mortgage tend to be the largest sources of assets and debts for most families surveyed (shown in Appendix exhibits 2 and 3, respectively). At the median, families that do not own a home have little in the way of assets ($12,200) or debts ($7,800).

Exhibit 10.
Total Median Asset and Debt Holdings (for families holding) by
Family Characteristic, 2004

(in thousands of 2004 dollars)

(in thousands of 2004 dollars). See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) and Urban Institute tabulations using the 2004 Survey of Consumer Finances.
Note: Breakout of income quintiles: Q1: <$18,000; Q2: $18,000-$31,999; Q3: $32,000-$51,999; Q4: $52,000-$85,999; Q5: >85,999.

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