Friday, May 1, 2015

The Consumer Debt Trap

The latest version of the Household Debt and Credit Report from the New York Federal Reserve Bank shows that household debt levels continue to rise, reaching their highest level in the fourth quarter of 2014 since the Great Recession.

Here is a graph showing total household debt, broken down into both non-housing debt (in red) and housing debt (in blue):

In the fourth quarter of 2014, total household indebtedness was $11.83 trillion, up $117 billion from the third quarter but still below the third quarter of 2008 when household debt hit a peak of $12.68 trillion.

Here is a further breakdown of debt types:

The largest component of household debt is mortgage debt; overall mortgage debt balances reached $8.17 trillion, up 0.5 percent from the previous quarter.  Non-housing debt balances increased to $3.15 trillion, up 2.6 percent from the previous quarter.  Student loan debt balances increased to $1.16 trillion, up $31 billion from the previous quarter.

One debt area that has seen significant growth is auto loans.  As shown on this graph, during 2014, the value of newly originated auto loans (in red) has reached levels not seen since 2005 - 2006:

In contrast, the value of newly originated mortgages (in blue) has fallen well below levels seen in 2012 and 2013 and remains at levels that are quite low by historical standards.

Now, let's look at the loan delinquency statistics.  Here is a graphic showing the total percentage of loans that are delinquent as well as those that are current (in dark green):

It is interesting to see that, at 6 percent, the percentage of loans that are delinquent is still significantly higher than it was prior to the Great Recession.   About $710 billion of outstanding consumer debt was considered delinquent in the fourth quarter of 2014 and, of that, $507 billion is seriously delinquent.  As well, during the fourth quarter of 2014, 268,000 American consumers had a bankruptcy notification added to their credit reports.

Here is a breakdown of loan types and what percentage were 90 days or more delinquent in the fourth quarter of 2014 and how the percentages compare to the previous quarter:

Mortgage delinquencies: 3.1 percent (down from 3.2 percent)
Student loans: 11.3 percent (up from 11.1 percent)
Auto loans: 3.5 percent (up from 3.1 percent)

Here is a graphic showing the volume of new seriously delinquent loans by type for the fourth quarter of 2014:

Now, let's look at a couple of debt problem areas.  

1.) Student Loans:  The most obvious change over the past few years has been the growth in the level of seriously delinquent student loans which, as I noted above, has now reached 11.3 percent.  This is problematic because, after mortgages, student loans make up the biggest fraction of total consumer loans.  What is of even greater concern is that the Fed's delinquency rate for student loans probably understates the real scope of the problem since about half of the student loans are still in deferment, the grace period that temporarily removes them from having to make payments.  According to the St. Louis Federal Reserve Bank, the total student loan delinquency problem (i.e. delinquencies of all types) is even worse as shown on this graphic:

In the fourth quarter of 2014, 17.9 percent of student loans were 30 days or more delinquent.  This will have long-term repercussions for the U.S. economy since many of these younger Americans will enter the housing market much later than their older counterparts.

2.) Credit Card Debt:  Another concerning factor about consumer debt is the growth in credit card debt.  Here is a graph showing the annual net growth in consumer credit card debt for the years between 2009 and 2014:

According to CardHub, consumers ended up 2014 with a $57.1 billion net gain in credit card debt, the highest annual increase since the Great Recession.  The average household's credit card balance was nearly $7200 at the end of 2014, very close to the tipping point of $8300, the danger level defined by CardHub as being unsustainable.  One thing that is lulling consumers into higher levels of credit card debt is low interest rates.  As shown on this graph, at 11.8 percent, the interest rate on consumer credit cards is just above the lowest levels that have been seen over the past two decades:

Thanks to the Federal Reserve, the lengthy period of ultra-low interest rates has lulled American consumers into what could prove to be a very painful debt trap.  While consumer debt delinquency rates are below their Great Recession highs, they are still quite elevated compared to the years before 2008 and any increase in interest rates on the growing levels of outstanding consumer debt could prove to be very painful to America's consumer-driven economy.

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