Record-low share of Americans' income is going to debt

In the first quarter of 2021, Americans used 8.2% of their monthly disposable income for debt payments, significantly lower than 9.8% recorded in the first quarter of 2020, according to data by the Federal Reserve Board. This household debt service ratio reached its highest point of 13.12% in the fourth quarter of 2007, with mortgage debt peaking at 7.2%.

"This is extremely unusual in a recession," Claudia Sahm, senior fellow at the Jain Family Institute and former Federal Reserve economist, told Yahoo Money. "People didn't go out and borrow in the way that they have in past recessions to make ends meet."

The ratio, though, is expected to tick higher in coming quarters as many of the key reasons behind the decline disappear. The drastic drop in the household debt service ratio - which consists of mortgage debt and consumer debt - was driven by two major factors.

First, Americans got a big boost to their disposable income during the pandemic, mostly driven by government transfers including stimulus payments and enhanced unemployment benefits. That helped to lower the ratio.

Disposable income reached its highest level on record of $22 trillion in March 2021 - the same month that the $1,400-per-person stimulus checks were disbursed and the extra $300 in weekly unemployment benefits started up. That was a significant increase from its pre-pandemic level of $16.8 trillion in February 2020, according to the Bureau of Economic Analysis.

"The ratio fell, notably, to a very low level," Sahm said. "But it fell to a very low level in the first quarter of this year, largely reflecting a jump in income due to the stimulus checks."

Redondo Beach, CA - May 14:A masked server delivers food to customers along S. Catalina Avenue in the Riviera Village shopping area of Redondo Beach, CA, a day after the Centers for Disease Control and Prevention (CDC) loosened guidelines for vaccinated people, with masks no longer being necessary when outdoors or in most indoor situations, Friday, May 14, 2021. The new guidelines state that fully vaccinated people no longer need to wear a mask or physically distance in any setting, except where required by federal, state, local, tribal, or territorial laws, rules, and regulations, including local business and workplace guidance.

A masked server delivers food to customers along S. Catalina Avenue in the Riviera Village shopping area of Redondo Beach, CA, a day after the Centers for Disease Control and Prevention (CDC) loosened guidelines for vaccinated people, with masks no longer being necessary when outdoors or in most indoor situations, Friday, May 14, 2021.

Americans also didn't pile on more debt during the pandemic, a second factor for the first-quarter decline in the household debt service ratio. Debt levels have consistently increased over the years - especially during recessions but the pandemic was an exception.

"During the crisis, the amount of debt service that people had stayed pretty flat, which was not the case in a Great Recession when it rose," Sahm said. For instance, collective credit card loans or balances were 11% lower on June 23 versus March 2020. The share of disposable income going to consumer debt service payments which excludes mortgage debt reached the lowest point on record of 4.8% in the first quarter of 2021, a drop from 5.7% from a year earlier.

Additionally, lower interest rates and high levels of mortgage refinancing helped lower Americans' debt load during the pandemic. The Federal Reserve kept the benchmark interest rate nearzero during the pandemic, lowering borrowing costs. As a result, the percentage of Americans' income that went to mortgage debt reached a historic low of 3.4% in the first quarter of 2021, down from 4% in the first quarter of 2020.

"Interest rates have been low for over a year. People have refinanced," Sahm said. "If you refinance the debt behind it is the same, but your monthly payments can go down a lot." The ratio is likely to rise as the pandemic fades.

If the job market remains robust, Americans will feel confident in taking on more debt, especially running up credit card balances on expenses they avoided during the pandemic such as travel and dining out. Already, credit card companies are offering huge bonuses to capture that post-pandemic splurge.