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NY Fed: Household debt rise marks a 'turning point'

Auto loans, student debt rekindle that old-time borrowing

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U.S. households took on more debt in the third quarter than since the bubble days of early 2008, and late payments continued to decline, the Federal Reserve Bank of New York said in a new report.

With the housing market recovering and other types of consumer debt rising, "it appears that households have crossed a turning point" away from post-recession austerity, New York Fed economist Donghoon Lee said in a statement.

Household debt was up 1.1 percent in the quarter that ended Sept. 30, the strongest quarterly advance since the first quarter of 2008, according to the New York Fed's latest Household Debt and Credit report, released Thursday morning. Outstanding debt for housing, student loans, autos and credit cards reached $11.28 trillion, about 11 percent below its pre-crisis peak five years ago.

The growth came without putting a strain on household finances, as delinquencies continued to improve. Loan balances overdue 90-plus days fell to 5.3 percent of total debt, the lowest delinquency rate since the third quarter of 2008.

Taking on more debt may not sound like a positive, but in a weak economy with low inflation, economists take it as a good sign. Households with both the financial strength and economic confidence to borrow more -- and spend more -- will spur production and job creation, putting to work more of the 11 million people still unemployed.

"There are definitely signs that consumers are a little more willing to borrow and lenders a little more willing to lend," said Scott Hoyt, senior director of consumer economics at Moody's Analytics. But calling it a turning point "might be overstating things a bit." With mortgages making up the bulk of household debt, he noted, the gradual decline in home foreclosures is bolstering household loan balances.

Where the debt is

The third quarter marked the first "substantial increase" in household debt since Americans began reducing their overall debt load in 2008, according to the report. The Fed's look at household balance sheets, drawn from about 40 million individuals' credit reports, said:

  • Credit card debt showed a relatively weak rise of $4 billion during the quarter, about one-half of 1 percent. Ninety-day delinquencies continued to improve, falling to 9.4 percent of overall balances from 10 percent.
  • Student loan debt gained $33 billion or about 3.3 percent, and the delinquency rate increased, reaching 11.8 percent of loans.
  • Auto loans outstanding surged $31 billion, about 3.8 percent, for their tenth-straight quarterly rise as new loans continued to increase. Delinquencies declined somewhat, reaching 3.4 percent.
  • Home mortgages were up less than 1 percent as the pace of new loans fell slightly and foreclosures continued to take a bite out of the total. However, the rate of homes going into foreclosure declined to levels last seen in 2005.
  • Home equity loans were the only component of household debt to decline, falling about 1 percent.

The report painted a somewhat different picture of card debt than the Federal Reserve Board's monthly report on consumer credit, which said revolving debt -- chiefly made up of credit card debt -- fell for the fourth straight month in September. Unlike the New York Fed's analysis, the monthly G.19 numbers are adjusted for seasonal fluctuations, factoring out expected increases or decreases. Banks bitten by card charge-offs during the recession are more willing to make auto loans than unsecured card loans to subprime borrowers.

The number of credit card accounts rose to 391 million, from 389 million in the previous quarter, the New York Fed said. The average consumer credit score declined slightly, to 695 from 697. The proportion of consumers with a debt in collection fell to 13.8 percent, from 14.6 percent, although the average amount rose by $49, to $1,458.

Other sources point to credit cards' regaining popularity, at least as a way of making new purchases. Credit cards stopped losing ground to debit cards at the cash register in 2012 for the first time in more than 20 years, the Nilson Report announced earlier this week. Credit cards accounted for 52.8 percent of card spending in 2012, versus about 47.2 percent for debit cards, the newsletter said.

See related: NY Fed: debt squeeze eases on households

Published: November 14, 2013


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