Variation in household leverage across regions has declined since 2007, while substantial variation remains within metro areas

Geographic areas that experienced the most household deleveraging – or reduction of debt – during the recession also experienced relatively severe economic contractions and slower recoveries. Federal Reserve Bank of Cleveland research economist Stephan Whitaker says much of the variation in household leverage across the US and within metropolitan areas can be explained by location, demographics, and the age of the housing stock. Whitaker also says that regions that had very high household leverage at the start of the recession have shifted back toward national norms, while the variation of leverage within metro areas has maintained steady relationships with neighborhood characteristics.

The largest component of household debt is home loans, and Whitaker explains that much of the geographic variation in neighborhood debt-to-income (DTI) ratios -- a standard measure of household leverage -- that existed in 2007 was driven by regions that had had extraordinary, unsustainable home price appreciation. These areas have since experienced substantial deleveraging.

Nevertheless, Whitaker says the places with the highest DTI ratios today are likely to be those with the highest prevailing home prices, such as California. Despite substantial deleveraging, the state’s metro areas still dominate the rankings of metro areas by DTI. Concentrated in the bottom of the rankings are northern industrial metro areas that have excess housing stock, such as the Fourth District cities of Cleveland, Pittsburgh, Toledo, and Dayton.

While the variation in household leverage across regions has declined, there remains substantial variation in household leverage within metro areas, says Whitaker. Columbus, Ohio, for example, has areas of high and low DTIs, with most high DTIs found in outer-ring census tracts.

Demographics and the housing stock explain the wide differences between tracts in the same metro areas. Not surprisingly, says Whitaker, census tracts with high DTIs have higher than average shares of married couples with children, newer homes, and college graduates. The opposite is true for tracts with the lowest DTIs. Whitaker says these patterns appear to have held steady through the recession and recovery.

Read The Evolution of Household Leverage During the Recovery

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892