A major contributor to the great recession of 2008 and 2009 was the huge amount of debt across the world and part of the economic healing has been “deleveraging” or the reduction and adjustment of that debt. Banks have been required to reduce their debt by both regulators and markets while corporations have been stockpiling cash and paying off debt. Governments have actually increased their debt in efforts to spur economic activity. So how are individuals and households doing?
According to the New York Federal Reserve’s Household Debt and Credit Report, overall household debt was up 0.7% in the third quarter of 2014 to $11.7 trillion, still well below the peak of $12.7 trillion in the third quarter of 2008. Credit card debt is down over 15% from the peak and delinquencies of 90 days or more are down to 7.5% from a peak of almost 14%. After a post-recession dip, auto loans are now above precession levels by 15% and have increased fairly steadily for the last four years.
Housing debt remains the biggest component of overall household debt and has had the biggest swing over the last 15 years. Housing debt accelerated dramatically in the 2000’s, doubling in five years and reaching nearly $9.3 trillion at its peak and then falling nearly as dramatically beginning in 2008. Through refinancing, paying down balances or defaults total housing debt fell to less than $8 trillion in mid-2103. New mortgage loans, including refinances, were up in the third quarter after a year if slowing.
Homeowners who are “underwater”, or owe more than the house is worth, peaked in the first quarter of 2012 at 31.4% of all homeowners with a mortgage, according to Zillow. That group fell to 17% in the second quarter of this year, lifting 6 million homeowners “above water” but still leaving 8.7 million houses underwater. At the same time, mortgages that are seriously overdue fell for the eleventh consecutive quarter to 3.2% from 5% at the peak.
Student loans have displaced credit card and housing debt as the driver behind overall debt levels. These loans have grown unabated and are now at $1.1 trillion, double the 2007 level and exceeding both credit card and auto loan balances. Student loans are also the only category with higher delinquencies since the recession, peaking at nearly 12% last year and still at 11.1%. Student loans are the most difficult to discharge in bankruptcy and economists are concerned that younger Americans who start out with high debt will be unable to save or spend in other ways as did prior generations.
Debt is not necessarily bad if it is manageable with available income. As a share of disposable income, total US household debt has fallen from a high of 135% in late 2007 to 108% now. This is the lowest level since 2003 and is still well below households in Canada, Japan and the UK, while also falling much faster than all other developed countries. (Combined non-housing debt for US households is around 25% of disposable income, so the majority of debt is secured to some extent by the value of homes.) At the same time, a recent survey shows that 18% of respondents, and 31% of those over age 65, expect to be in debt their entire lives.
Still, with the strong stock market and the real estate recovery, the net worth of US households (the value of all assets less all debts), grew to a record $81 trillion, far surpassing the pre-recession level of $68 trillion. The median household net worth, though, is actually down from 2010 as the gains have accrued disproportionately to higher income households.
Debt can have several benefits when used properly. It can enable the acquisition of things that have lasting value, like a house or an education. It can increase the return on invested capital when assets are sold at a profit, because the profit goes entirely to the investor while the lender is simply repaid the amount of the debt. Most important, because even modest inflation decreases buying power, debts with fixed payments are repaid with “cheaper” dollars over time.
But debt can also have huge negative impacts. Using ongoing debt to pay for disposable goods like entertainment, travel and clothing absorbs future buying power. Fixed debt payments reduce economic mobility and flexibility to say nothing of reducing the opportunity to save for future needs like retirement; in other words, high debts can cause people to get “stuck” in their current circumstances. And when there is even a slight reduction in income, debt payments can lead to a downward spiral of lower credit ratings and higher payments.
Debtor’s prisons were eliminated in this country nearly 200 years ago. In the meantime, many of us have unwittingly, but willingly, built our own prisons.