The poorest Americans now owe 156% of their pretax income to creditors, according to a new study by the Federal Reserve Bank. The poorest have more debt relative to their net worth in American history, owing $1.37 for every dollar they own.
According to the Survey of Consumer Finances, a study conducted every three years by the Fed, the average family in the lowest 25% income bracket holds around $47,000 in debt, down slightly from 2010 but up significantly from before the subprime financial crisis that wiped out a significant amount of assets held by the American lower middle class, particularly housing.
Big Mortgages, Small Stock Holdings
Total mortgage debt has increased 68% since 2007 for the poorest, with around $26,000 in outstanding mortgage debt per poor household. For most poor families, mortgage debt is significantly higher because many of the poorest Americans do not own any real estate whatsoever.
At the same time, the poorest were extremely unlikely to hold any investments at all. Of all Americans in the lowest 25% wealth bracket, only 1.6% of those surveyed held any equity investments. While stocks have rallied in recent years, with the S&P 500 more than doubling from the post-recession low and climbing 30% in 2013, most of America’s low income earners have seen no gains to their own net worth as a result.
While the poorest are unlikely to hold stocks, the average American is also unlikely to be in the stock market. Only 5.2% of Americans in the 25-49.9% wealth bracket said they held stocks, and only 11.4% of Americans in the 50-74.9% wealth bracket held stocks as well. That compares to half of the top 10% of wealthiest Americans, who said they own stocks.
All categories of Americans have less stock holdings than they did in the 2000s, as continued mistrust and skepticism of Wall Street has discouraged retail investors from participating in the equity market. In 2001, Americans in the lowest 25% wealth bracket were over three times more likely to hold shares than they are today.
Fed to Make Debt More Expensive
As poor and lower middle class Americans are seeing greater debt holdings and less income to pay for their debts, analysts fret that rising interest rates will impoverish millions of Americans even further. Nonetheless, many economists believe the Federal Reserve will begin rising interest rates in 2015.
When that happens, mortgages, personal loans, credit cards, and student loans will have higher interest rates and higher monthly payments. These debts will carry higher prices for consumers after the Federal Reserve raises interest rates on its Federal funds rate, which is tied to many corporate and consumer debt instruments.
Global Shockwaves at Rising Rates
Earlier in the year, Janet Yellen hinted that the Federal Reserve would raise interest rates in the middle of 2015. When the FOMC meets later this week to decide on its forward monetary policy, most analysts are expecting more definitive statements regarding when interest rates will go up.
Paul Dales of Capital Economics, a consulting firm, said that the Federal Reserve is going to increase interest rates that will cause all debt to become more expensive. "It does seem like a done deal that it is going to increase interest rates," Dales said, adding, “We are going into a new phase where the Fed is trying to bring things back to normal. It can send reverberations around the world economy."