Please Help! Aggregate Debt to Income Ratio & the Bubble

[physics]

This graph is from a release of the Finance and Economics Discussion Series of the Federal Reserve Board in August of '07 http://pewsocialtrends.org/pubs/?chartid=539 Here are the same aggregate figures (total debt/total income in billions) broken down with graphs in a simple pdf http://www.demographia.com/db-usdebtratio-history.pdf

I am not an economist, so if I've got this wrong, please tell me what I am missing! All I know is banks make money by charging interest on loans. As we have slowly approached a debt to income ratio of one, and now have surpassed it, shouldn't it have been clear to EVERYONE a decade ago that eventually the money banks can make by financing our lives was running dry and reaching a max (i.e. all of it)?

Please help me to understand if this hypothesis has any validity... If our current aggregate debt to disposable income ratio is 1.2ish, mostly because of primary residence debt, shouldn't we expect to see an aggregate decrease of at least 20% in home prices to get back to a level where loans are being made that people can actually afford with their disposable income?

It can't be this simple, what am I missing?

[WestSideBilly]

Debt isn't collected on the same time frame that income is measured. When you buy a house (with a real loan, not a subprime suicide loan), your debt:income instantly increases by roughly 3-4. A lot of people were taking out 6:1, 8:1, probably even 10:1 loans the last few years, which can really skew it.

Car loans are 3-6 years, credit cards "amortize" over 7-10 (usually at high interest rates), student loans are 10-15, and so on...

For an individual, I would think 5:1 or 6:1 is where the red flags would be flying (consider buying a house, new car, and a bunch of furniture on your credit cards all at once). As a large aggregate group, 1:1 is pretty risky territory.

Also, this might be more meaningful if you also factored in savings (which would probably make it look worse, not better, in the US).