Alternative Finances

Americans Are Borrowing Like It’s 2008 … Sort Of

It took almost a full decade, but Americans’ debt level has reached a new all-time high, surpassing the $12.68 trillion peak it reached in the fall of 2008 — the same time that the Great Recession was earning its place in the history books.

According to the latest data out of the New York Federal Reserve, total U.S. household debt hit $12.73 trillion at the end of the first quarter of 2017, up $473 billion from a year ago and $50 billion above the previous 2008 record.

The news itself is “neither cause of celebration or alarm,” according to NY Fed Research Officer and study co-author Donghoon Lee. Household debt’s normal course has been toward increasing in the post-WWII era. The last nine years have been a significant deviation from what had been the normal course.

“The decline in debt between 2008 and 2013 was an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession. In all, it took almost nine years for total debt to catch up with its 2008 level.”

And while that catch-up is notable, the NY Fed noted that because it indicates something like a return to normal in the economy — it is also notable that the new normal is not exactly the same as the old norm.

The good news is that the fundamentals of the new normal are looking a good deal more stable than did their counterparts nine years ago.

The not so good news? The areas of weakness are present — and looking weaker. And those weak areas are also perhaps of some concern when looking at what’s next for the development of the economy.

The Debt Realigned

The household debt of 2017 is somewhat different than its 2008 equivalent, since the figures are not adjusted for inflation, wage increases or population size. As a result, $12.73 trillion in household debt in 2017 represents about 67 percent of the U.S. economy, whereas the $12.68 trillion in household debt of 2008 represented 85 percent of the U.S. economy.

The distribution of the debt has also changed notably.

Mortgage debt at the previous peak in 2008 accounted for 73 percent of the total household debt. As of Q1 2017, mortgage debt — at a collective of $8.63 trillion — is still the largest contributor to household debt and represents a much smaller share of overall indebtedness at 68 percent.

Mortgage borrowers are also a very different group than they were nine years ago at the outset of the financial crisis — in part because of tougher lending standards mandated by federal regulators.

As of Q1 2017, 61 percent of new mortgages were given to borrowers with credit scores of 760 or higher. In 2008, only 36 percent of mortgages went to that super-prime borrowing class.

And the shift in mortgage lending mirrors a shift in the lending picture in general when it comes to who holds the majority of U.S. household debt.

“Borrowers look quite different today,” Lee noted.

And, in fact, they do — literally — because the average borrower is a lot older than they were 10 years ago. In 2008, Americans over the age of 60 held 16 percent of all loans — as of 2017, that number has grown to 22.5 percent.

Selective lending to those who are more able to handle credit — particularly in the low interest rate environment that has been the norm for the last decade — also means the delinquency picture is very different today than it was during the heights of the Great Recession.

Debt at least 90 days past due was 3.4 percent in the first quarter of the year, a pick-up from Q4 but well below the 2010 high of 8.7 percent.

“While most delinquency flows have improved markedly since the Great Recession and remain low overall, there are divergent trends among debt types,” Lee said.

Diverging Trends

While mortgage delinquency rates continue to fall, delinquency rates on auto loans and credit cards are trending up.

Student loan delinquencies, the report noted, are particularly problematic as student loans are becoming an increasingly big part of the household debt picture — because they are high and seemingly on the rise.

The total value of student loans was around $1.3 trillion in the first quarter, a 120 percent increase since 2008.

Almost 11 percent of that debt is 90 days overdue or more. By Fed estimates, as much as 22 percent of those loans could risk being overdue but for deferred loan payments due to unemployment or continuing education.

Auto loans are also an area of increasing interest to loans — which have increased by a whopping 44 percent to $1.17 trillion since the last peak in household debt in 2008.

About 3.8 percent of those loans have fallen 90 days or more overdue, an increase over the 3.3 percent two years ago though still notably below the 5.3 percent default rate in late 2010. Watchers are concerned, however, because those default rates are hitting sub-prime borrowers and lenders particularly hard. The situation is increasingly being mirrored among card issuers that serve near-prime and subprime borrowers.

Which leads to the bigger overall concern: the millennial borrower. The data indicates that the two loan areas where there is the biggest growth — car loans and student loans — are also the segments that have the largest share of millennial buyers — and the highest and fastest growing default rates.

The data also indicates that mortgages and credit cards are increasingly still below where they were 10 years ago — and increasingly in the hands of customers who are over the age of 60 with prime credit.

And while one might hope millennials might earn their way out of this, there is some doubt since only about half of them will make as much or more than their parents did.

The new Fed data doesn’t offer reasons to celebrate or run for the hills, but it does seem to pose a question that is popping up increasingly about Generation Y: What do you do with a generation of 70 million people whose economic future may not look very much like the economic past that preceded them?

And as Karen Webster pointed out in the Coming Millennial FinTech Crisis, while there is a lot of data to point at the problem, there aren’t very many easy answers.

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