NY Fed Says US Household Debt Higher, But Not A Risk

A little over a decade ago, something nearly unprecedented happened in the American economy: household debt contracted instead of growing. After hitting a peak a little north of $12 trillion in 2008, household debt began contracting in 2008 and kept falling through 2012, according to the Federal Reserve Board’s Financial Accounts of the United States.

The trigger, of course, was the Great Recession and consumers and banks pulling the credit levers back and hard.

The trend began to reverse in 2013 and household debt began to grow, albeit at a much slower rate that it had in the early aughts. By the first quarter of 2017, household debt had passed its 2008 peak of $12.657 billion, according to a new report released by the New York Fed. As of the last quarter of 2018, total U.S. household debt stood at $13.58 trillion.

The good news, according to the Fed, is that though the raw number is now nearly a trillion dollars above where it was at its pre-recession peak, the picture is quite different this time around.

“We find that while total household debt has recovered to its previous level in nominal terms, its composition and characteristics have changed dramatically along many dimensions,” the report authors wrote.

Mortgage (or housing) debt, the report noted, was an area of particular interest, since it was such a critical factor in unwinding the economy a decade ago. According to the report, between 2005 and 2010, mortgage debt represented 78 percent of total household debt; as of late 2018 mortgage debt accounts for only 71 percent of the total. In real dollar terms, that means mortgage debt is worth around $1 trillion less than it was at its 2008 peak.

“A decade of tight underwriting, particularly on housing debt, has restrained the overall growth of debt, and changed the composition of debt. It has also influenced the distribution of debt over household types,” the research said. “This same tight underwriting has allowed mortgage delinquency rates and transitions to fall to very low levels, and has made the outstanding stock of mortgage debt considerably safer than in any time since before the Great Recession.”

The trend, according to the report, is visible in most major debt categories — particularly home and credit card lending. The absolute numbers are going up, but the people taking out loans on the whole are older, more affluent and armed with better credit scores. At the end of 2018, super-prime borrowers with FICO scores north of 760 were taking out the majority of the new credit products.

“Trends since 2008 have focused debt growth among older, higher credit score, and presumably wealthier, households,” the report said. “And unlike in the years preceding the Great Recession, debt growth during the recovery appears to be much more sustainable.”

That is the good news — debt is up, but it is more sustainable this time around.

The bad news? The credit situation is much, much better for some than for others. Younger consumers struggle.

“Burdened by increasing amounts of student debt, reduced homeownership and home equity, and relatively high or increasing student and auto loan delinquency rates, their financial situation contrasts sharply with the overall generally improved dynamics in household debt,” the New York Fed report said.

Younger borrowers are less likely to have home loans, according to the New York Fed, and more likely to default on auto loans or credit card bills. They are also more likely to take out a sub-prime auto loan with high rates and a small line credit card with higher rates. That separates millennials from both baby boomers and Gen Xers today — and makes them different from how their Gen X counterparts behaved at the same age in the late 1990s and early 2000s. That latter divergence, the Fed noted in the report, is “worth monitoring closely.”

Also worth a closer glance when it comes to the young and the debt-burdened, according to the report, is the increasing share of total household debt that student and auto lending represent. Student loan debts have increased by $700 billion since the Great Recession, while auto loan debt has climbed $350 billion. They make up 10.7 and 9.3 percent of household debt respectively.

“That is much higher than in years past, and shows little signs of abating, particularly the level of student loan debt, which has never fallen,” the report notes.

And, as of 2019, shows little sign of falling off any time soon. That, the report notes, could have a dragging effect on the economy, as students paying off educational debt are less likely to start families and buy homes — which over time may slow economic growth. Moreover, sluggish access to personal credit — like cards — could slow down the process for younger borrowers as they attempt to move up the credit ladder to things like home loans.

The takeaway is that while debt levels are higher than they were right before the economic crash, the composition of that debt is quite different than it was a decade ago. America’s most avid users of credit are, by and large, also its more stable users of credit.

But a generation of borrowers who are lagging behind the market, and stalling out too early with one form of debt — that could be a reason for concern.