America’s Expanding Debt Footprint (And What It Really Means)

When the Great Recession kicked off a decade ago, for a brief but memorable time, it seemed as though credit in the United States was never going to recover. And not just in one branch of underwriting — for a short while there, it seemed like all of it had hit Game Over status — with consumers; SMB and even enterprise-level lending slowed to a near stop.

Though not all segments recovered at equal speeds (and the SMB segment is still playing catch-up in some regards, even a full decade after the great credit crunch), lending is back. Using the Federal Reserve’s data as its guide, LendingTree‘s latest analysis indicates that, among consumers, lending hasn’t just recovered to the point where it was a decade ago on the eve of the Great Recession — it has, in fact, surpassed it. American household debt is currently on pace to be $1 trillion above the peak debt level of 2008 by the end of this month. That figure has been increasing at a 3.4 percent annual rate and includes mortgage debt.

It is hard to ignore that “trillion,” as thirteen-digit numbers are always uniquely attention-getting. However, the mere fact that the number is large and impressive is not necessarily a reason for concern, according LendingTree Chief Economist Tendayi Kapfidze. Debt, by its nature, grows, he told PYMNTS in a recent conversation — and just a quick headcount on how much there is is not necessarily a complete picture.

“Debut always grows, usually because the economy is growing. As consumers earn more, they tend to borrow more to finance a wider range of activities instead of paying directly from their earnings. Debt alone is not a reason for alarm — the bigger question is how income is growing up and in relation to debt.”

When one steps back, he noted, and looks at the total picture for 2018, it is notably different from 2008 in many regards.

A Different Economy

Debt, Kapfidze noted, is up over a trillion dollars in the last decade, as the market has recovered and shot past its previous highs. But, he added, while those debt numbers get a lot of play, it is worth noting that personal income has gone up $5 trillion in the same amount of time — or $4 trillion after taxes. Consumers are taking on more debt, but they have more income with which to cover it.

He said, “This level of debt is more manageable than it was at the time of the financial crisis because of those income numbers. And while there has been some slight uptick in default in sub-prime auto borrowers, when you look at default rates as a whole, they are looking very favorable in comparison to long-term history.”

Moreover, he notes, the shape of debt is changing. Mortgages, which ended up being the underwriting area that brought down the economy a decade ago, is a very different place today than it was then. Lenders are, by statute, required to be more careful, which means the era of the genuinely burdensome mortgage is largely past. Mortgage balances are currently around 68 percent of disposable income, and credit card balances are less than 7 percent of income. In 2008, balances were as high as 98 percent and 10 percent, respectively.

“The mortgages have much more stringent underwriting standards than they had then — a lot of the Wild West stuff that was going on like liar’s loans, that didn’t make borrowers prove their income, are no longer around.”

While mortgages have calmed down, and credit-card lending has been flat, there has been a massive, counterbalancing spike in student loan debt. Student loan debt recently surpassed $1.5 trillion and comprises 42 percent of all consumer debt. But that 42 percent of debt is not divided evenly among consumers — millennials are carrying the vast bulk of it.

The good news, Kapfidze noted, is that some of the headlines on this are a bit misleading. Six-figure student debt exists, but it is far from the rule. Most students owe closer to $30,000, not $250,000.

“But, of course, that kind of debt burden has an effect,” Kapfidze said — and it is an area of concern when it comes to younger borrowers.

Things To Watch

Younger borrowers, millennials in specific, are not only represented when it comes to student loan debt, but they are underrepresented when it comes to mortgage debt. Some of that, Kapfidze said, has a bit to do with the age spread of the cohort — since millennials still in college and just out would be unlikely to buy homes.

“And among older millennials, we are starting to see the expected home buying, so it makes some sense to split the cohort.”

The bigger worry, he noted, is the environment where consumers ran up their debts versus the environment where consumers will be paying off their debts. Interest rates are going up, which means any debt with an adjustable rate will be more expensive for anyone paying interest, and that could provide a challenge for consumers.

“On the other hand, there is also higher employment and higher wages, so it really is seeing what ends up being more important,” Kapfidze said.