Household debt is one of the many data points I review when looking at the economy. Since the great recession, household debt has decreased steadily over the last 4 years as consumers have paid down debt and as debt has been charged off in foreclosures. Over the last few quarters however, we have seen household debt start to slowly increase again, which is a positive trend. People once again are in a situation where they can borrow money and buy consumer goods, and foreclosures are down to pre-recession levels. When you look deeper inside the numbers at what is growing in consumer debt, one of the astonishing trends is the substantial increase in student loans, which now compose a larger portion of the nation’s consumer debt than auto loans.
There was an article in The Wall Street Journal last week that stated since the financial crisis all categories of household debt have decreased substantially, with the exception of student loan borrowing. Not only has student loan borrowing increased, it has done so at double digit rates during the entire financial crisis timeframe. One of the long-term effects of this increase is that while new households are being formed, they are not buying houses at anywhere near the rate they have done so in the past. As a matter of fact, home ownership is currently at a 19 year low. There are many reasons contributing to this, but student loan debt is certainly one of the major factors.
Jon Houk, CFP®
U.S. Household Debt Increases
New York Fed Report Also Shows Aversion to Using Credit Cards, Taking Out New Mortgages
By: NEIL SHAH
Americans made more progress in repairing their postrecession finances and have increased their overall borrowing, yet they are also showing an aversion to credit cards and new mortgages that could hinder the economic recovery.
Household debt—including mortgages, credit cards, auto loans and student loans—rose $129 billion between January and March to $11.65 trillion, new figures from the Federal Reserve Bank of New York showed Tuesday. That was the third consecutive quarterly increase.
Behind the uptick: Mortgage balances—which make up the bulk of U.S. household debt—rose $116 billion to $8.2 trillion, thanks in part to fewer people going into foreclosure, which drags down mortgage debt. Auto-loan balances grew $12 billion to $875 billion. Student-loan balances increased $31 billion to $1.1 trillion, maintaining its place as the fastest-growing debt category.
Despite all their progress digging out of the downturn, however, U.S. consumers are displaying a heightened wariness about using credit cards or taking out new mortgages.
The amount of credit-card debt outstanding fell to the lowest levels since 2002. Credit-card balances fell $24 billion to $659 billion from the prior quarter, just slightly below the level from a year earlier. New originations of mortgages dropped for the third straight quarter to $332 billion, the lowest since the third quarter of 2011, possibly due to rising home prices in many markets that have made buying less affordable.
The figures suggest Americans are still playing it safe when it comes to borrowing, a practice that should help protect them from longer-run excesses. But the combination of weak demand for credit and slow real wage growth could bode ill for consumer spending, which accounts for more than two-thirds of economic output.
Tanya Prime and her husband are debating whether they should be borrowing more. Ms. Prime’s husband, John, owns a restaurant and catering business that is seeing business pick up substantially this year. After years in which Mr. Prime put personal funds into the business, potential investors are coming to him, making him more confident about borrowing.
But Ms. Prime said she “doesn’t feel comfortable with any large borrowing right now.” That’s because her savings were depleted after she left her non-profit job in 2012 to care for the couple’s four children.
While she is hoping to return to work, she wants to keep a lid on debt. “Borrowing for a washer or dryer is the last thing we’d do,” said Ms. Prime, 44 years old.
In some ways, it is good news that Americans are becoming more responsible about debt. An epidemic of overborrowing was a key reason for the 2008 financial crisis and recession.
Andrea Yun, a professional cellist in Ann Arbor, Mich., said she has moved down to a single credit card—from at least three—as she avoids racking up debt. She recently got married and had a baby daughter two weeks ago. She and her husband, Brian, have steered clear of borrowing to buy baby items, choosing to get hand-me-downs from friends with children.
“I’ve made a point of going off credit, and Brian, too,” said Ms. Yun, 39. “We don’t want to go in over our heads.”
Some Americans may have changed how they use credit cards in the recession’s wake, in many cases paying off their balances promptly. The share of credit-card debt 90 or more days overdue fell in the first quarter to 8.5% from 9.5%.
Lending standards for mortgages, meanwhile, remain fairly tight when it comes to younger and first-time home buyers and those with tarnished credit.
Indeed, one group shying away from debt may be younger Americans. The growth of student-loan debt, along with limited access to credit, may be preventing those with student loans outstanding from being more active in the nation’s housing and auto markets, New York Fed researchers said Tuesday.
Less borrowing by younger people for things like cars and houses is a worry because it could reduce overall consumption at a time when baby boomers are retiring and likely spending less, too.
The weak borrowing trends also could signal a continued lack of faith in the recovery. If Americans don’t borrow and spend more, that would mean weaker economic and hiring activity, miring growth in a kind of negative feedback loop.
“There’s some hesitation about reloading on debt at a time when the economy is still facing just moderate growth,” said RBS economist Omair Sharif. “I’m not sure the demand is really there for boosting your level of debt when you just spent years working it down.”
If the economy does see a pickup this spring and summer after a weak winter, more borrowing and spending could be in the cards. Randy Hopper, vice president of credit cards at Navy Federal Credit Union, said spending activity on the firm’s roughly 2 million credit-card accounts was flat in the first quarter, especially in January and February. But things perked up in late March and April.
“We’re happy to see consumers continuing to get their balance sheets in order,” Mr. Hopper said. “That will enable spending acceleration in the summer and second half of the year.”
