Monday, February 26, 2018

Household Credit - Forgetting the Lessons of the Great Recession

With some experts predicting as many as four interest rate increases by the Federal Reserve during 2018, one aspect of the economy should be concerning to central bankers, that of personal debt, an issue with a direct relationship to the last recession.

According to the New York Fed's own Quarterly Report on Household Debt and Credit for the fourth quarter of 2018, household debt balances have achieved another record as shown on this graphic:

For the fourteenth quarter in a row, aggregate household debt rose in Q4 to $13.15 trillion, an increase of $193 billion on a quarter-over-quarter basis and a substantial $473 billion higher than the previous pre-Great Recession peak of $12.68 trillion which was achieved in Q3 2008.  As well, household debt is now 17.9 percent higher than its post-Great Recession nadir which was reached in the second quarter of 2013.

Mortgage debt is the largest component of consumer debt with total mortgage balances of $8.88 trillion at the end of 2017, a quarter-over-quarter increase of $139 billion.  Mortgage originations for the fourth quarter stood at $452 billion, down from $479 billion in the previous quarter.  

The only upside to the current consumer credit picture is that delinquencies, currently at 4.7 percent, are well below the levels experienced during and immediately after the Great Recession, a scenario that is likely to change substantially should the Federal Reserve, in its infinite wisdom, keep its tightening trajectory:

Nonetheless, of the $619 billion of debt that is delinquent, $406 billion is at least 90 days or more late with a slow but steady increase in severely delinquent auto loans and a significant increase in credit card balances that are delinquent as shown here:

One of the outstanding debt problems is loans to students.  Outstanding student loan debt grew to $1.38 trillion at the end of 2017 with 11 percent of aggregate student loans either 90 days or more late or in default.  

In case you were curious, there is a significant difference in the total debt balance per capita for various states as shown here:

California is a standout when it comes to per capita indebtedness, largely because of severely overpriced real estate in some of the state's real estate markets as you can see from this graphic which breaks down the composition of debt balance on a per capita basis:

Certainly, the overall consumer debt situation, particularly home equity lines of credit, are not at the dangerous levels experienced prior to the Great Recession, however, the long period of ultra-cheap borrowing has lured consumers to consume with borrowed money.  In combination with this:

...the long period of loose monetary policies by America's central bankers have convinced consumers that saving money is simply a waste of time and that it is more fun to borrow, borrow, borrow and buy, buy, buy.  The painful reality of over-consuming with debt may never come home to roost...with any luck.

Apparently, the hard lessons taught by the Great Recession have been long forgotten by many American households.

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