Research and Statistics

Household debt passes pre-recession peak, NY Fed finds


U.S. household debt has surpassed its pre-recession peak for the first time, says new data from the NY Fed

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Household debt in the U.S. passed its pre-recession peak in the first quarter of 2017 for the first time, while credit card delinquencies moved upward as well, according to a new report from the Federal Reserve Bank of New York.

Debt including mortgages, student loans, auto loans, credit cards and home equity rose for the 11th quarter in a row, reaching $12.73 trillion in the first three months of this year, according to the Household Debt And Credit report. The previous peak in 2008 was $12.68 trillion.

Economists said that the milestone doesn’t mean consumers are getting over-leveraged again in ways that helped trigger the Great Recession.

“The fact it bounced back is not alarming,” said Michael Dolega, senior economist at TD Economics. “The economy is significantly larger than it was at that time.” In the first quarter of 2017, U.S. GDP was 28 percent bigger than its pre-recession peak, he said. “That gives you a significantly bigger base – you’d expect credit to grow along with the economy.”

Credit card debt, delinquencies rise
Credit card debt, while rising in general, remains short of its previous peak. According to data released with the report, credit card balances were $764 billion in the first quarter. That’s $52 billion more than the same period in 2016, but still below the 2008 peak of $866 billion.

New delinquencies on cards ticked up in the quarter, Fed economists said in a blog post, but the overall rate of late payments remains below historical norms. As a percent of balances, serious delinquencies of 90 days or more were 7.45 percent, compared to 9.49 percent in the first quarter of 2008. Card delinquencies normally rise in the first quarter, following the heavy spending of the holiday season.

Debt repayment priorities: Credit cards come last
Another study Wednesday from the credit bureau TransUnion found that people are surprisingly putting a higher priority on repaying unsecured personal loans than their auto loans, mortgages and credit cards. Of the four types of loans, credit cards saw the biggest delinquency jump in one year – from 2.87 percent in the fourth quarter of 2015 to 3.65 percent in the same period in 2016.

The study looked at delinquency rates for the four types of credit, for people who were initially up-to-date with their payments at the beginning of a year-long study period. Looking at five years ending in 2016, delinquencies for personal loans were consistently lower than on other forms of credit, TransUnion found, showing that people kept making payments on these loans while letting others lapse. The next highest repayment priority went to auto loans, followed by mortgages and lastly, credit cards.

The company called the result surprising, but explainable. “We believe the relatively short duration of these loans – less than 30 months – is a key factor in the decision process of consumers,” Ezra Becker, senior vice president and head of research for TransUnion’s financial services business unit, said in a statement.

The shorter-term may make it easier for consumers to face paying off the loan than longer-term auto and mortgages. Personal loans – which exclude payday-type loans in the company’s study – are amounts borrowed for expenses such as large appliances, or sometimes for debt consolidation, the company said.

Student loans on the spot
New York Fed economists cautioned not to read the report released Wednesday as a sign of doom – or excess confidence.

“Before bringing out the confetti (or sounding the warning bells), it’s important to get some historical perspective,” Andrew Haughwout and three other economists at the New York Fed wrote in a blog post.

While the debt load has reached a nominal milestone, “The composition of current household debt is very different from that in 2008,” the economists said. Student loans make up a bigger portion of the overall total, having grown by $765 billion since the first quarter of 2008.

Older, more creditworthy borrowers account for more of today’s debt, they added, helping to hold delinquencies at low levels. However, defaults on student loans continue to climb.

Dolega said bank underwriting has tightened from pre-recession days of low- and no-document mortgages, putting today’s consumer debt load on a more solid foundation. Banks are focusing more on borrowers “who are more likely to repay these loans,” which will help hold default rates low in the future, he said.

The household debt report is drawn from a sample of nationally representative Equifax credit reports, allowing comparisons back to 1999.

Data from bank balance sheets has shown similar trends. The Federal Reserve’s G.19 consumer credit report shows that revolving debt balances – mainly composed of credit cards – have been hovering around the $1 trillion level in recent months, approaching but not reaching pre-recession highs.

The TransUnion study is available behind a sign-up page.

See related: How much is the average credit card debt in America?, APRs on the rise as Fed steps up rate hikes

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