Household Debt Is Rising, but Consumers in Better Shape

Household debt has reached its highest level since the financial crisis but delinquency rates are lower, according to a New York Fed report

Household debt has risen to levels not seen since the financial crisis, but household balance sheets today are in much better shape, according to the New York Fed’s latest Quarterly Report on Household Debt and Credit.

While household debt rose $460 billion to $12.58 trillion as of year-end 2016, delinquency rates were under 5% compared to over 8.5% in the third quarter of 2008, after which they continued to rise.

In addition, mortgage debt and home equity lines of credit (HELOC), which drove the debt boom during the financial crisis, peaking at 79% of household liabilities, fell to 71%.

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Also, according to another New York Fed report, focusing on the “home ownership gap,” the number of households who owe more on their mortgage than their house is worth dropped to 1.5 million, down from an estimated 10.5 million in 2009, and the percentage of homeowners with positive equity in their homes rose. It was 63% as of the end of 2015 compared with about 53% in 2009.

“Debt looks very different in 2016 than it did the last time we saw this level of indebtedness,” according to the New York Fed’s debt update.

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Then, housing-related debt was the biggest burden for consumers, but as of year-end 2016, only 1.6% of mortgage balances were 90 days or more delinquent compared with 3.8% of auto loan balances, 7.1% of credit card balances and at least 11.2% of student loan debt (Fed economists note the rate could be much higher because loans in deferment, grace periods or forbearance are excluded from the repayment cycle).

“There have been shifts in the way American households borrow,” the Fed economists wrote.

Mortgage balances, however, remain the largest component of household debt, increasing $130 billion from the third quarter to $8.48 trillion as of year-end 2016, while HELOC balances were little changed at $473 billion.

Balances on credit cards debt grew by $32 billion followed by student loan debt, up $31 billion, and auto loans, up $22 billion.

Fed economists attributed the growing balances to the extension of credit for new loans. Auto loan originations in the fourth quarter, for example, reached $142 billion, their highest level since the Fed began collecting the data 18 years ago, while mortgage originations, which include refinanced loans, rose $617 billion, their highest level since the beginning of the Great Recession.

But while credit was extended to consumers, not all qualified for new loans because credit requirements were tightened. The median credit scores for new home loans rose to 763 and for new auto loans to 700.

In addition to shifts in the way consumers borrow, there are also shifts in the way banks lend.

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