Job gains, economic growth boosted households’ income and willingness to borrow
The total debt held by American households reached a record in early
By Ben Leubsdorf
Updated May 17, 2017 1:26 p.m. ET
The total debt held by American households reached a record in early 2017, exceeding its 2008 peak after years of retrenchment against a backdrop of financial crisis, recession and modest economic growth.
Much has changed over the past 8½ years. The economy is larger, lending standards are tighter and less debt is delinquent. Mortgages remain the largest form of household borrowing but have become a smaller share of total debt as consumers take on more automotive and student loans.
“The debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said.
He added: “This record debt level is neither a reason to celebrate nor a cause for alarm.”
Debt Hits New High
Americans' debt has returned to levels last seen before the recession in nominal terms,but the makeup of that debt has changed significantly. Change in total debt balance, by type,since its previous peak in 2008:THE WALL STREET JOURNAL Source: Federal Reserve Bank of New York
The total-debt milestone, announced Wednesday by the Federal Reserve Bank of New York, was a long time coming. Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, looking at data back to the end of World War II, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”
In the first quarter, total debt was up about 14% from that low point as steady job gains, falling unemployment and continued economic growth boosted households’ income and willingness to borrow. The New York Fed report said total household debt rose by $149 billion in the first three months of 2017 compared with the prior quarter to a total of $12.725 trillion.
The pace of new lending slowed from the strong fourth quarter. Mortgage balances rose from the final three months of 2016, while home-equity lines of credit were down. Automotive loans rose, as did student loans, but credit-card debt fell along with other types of debt.
The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy. In the first quarter, total debt was about 67% of nominal gross domestic product versus roughly 85% of GDP in the third quarter of 2008.
Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, about 68% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were roughly 73% of total debt. Student loans rose from about 5% to around 11% of total indebtedness, and auto loans went from roughly 6% to about 9%.
The Decline and Rise of Household Debt
Mortgages continue to account for the majority of overall U.S. household debt, though student and auto loans represent a growing share of the total.THE WALL STREET JOURNAL Source: Federal Reserve Bank of New York
Mortgage lending to subprime borrowers has dwindled since the housing crisis in favor of loans to consumers considered more likely to repay. In the first quarter, borrowers with credit scores under 620 accounted for less than 4% of mortgage originations, compared with more than 15% a decade earlier. Borrowers with credit scores of 760 or higher had about 61% of originations last quarter, versus about 24% in the first quarter of 2007.
Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low. About a fifth of auto-loan originations last quarter went to borrowers with credit scores below 620, down from roughly 30% a decade earlier.
Still, standards have tightened. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations. In the first quarter of 2007, the median scores were 678 for auto loans and 712 for mortgages.
The share of debt considered seriously delinquent—at least 90 days late—is down from recession-era levels, but varies widely by type of loan.THE WALL STREET JOURNAL Source: Federal Reserve Bank of New York
Less than 5% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent. The overall seriously delinquent rate remains well below levels seen in the recession’s immediate aftermath, though delinquencies have climbed recently for credit-card debt and auto loans and remain high for student loans, according to Wednesday’s report.