The Anticipation is Over: U.S. Household Debt Surpasses Pre-Recession Levels
The last time consumer debt levels were this high, Amazon Prime was in its infancy, Uber and Bitcoin didn’t exist, and George W. Bush was president. Following the Great Recession, both lenders and borrowers retrenched as banks tightened underwriting and consumers were feeling the effects of high unemployment and a housing crisis. Fast forward, and total household debt has surpassed pre-crisis peaks in Q1 2017 after 11 consecutive quarters of growth. While much of the debt was driven by mortgages and HELOCs before the crisis, non-mortgage debt is now driving growth, comprising nearly 30% of total consumer debt compared to 21% in 2008 as shown in Figure 1. There is some concern that the growth in total household debt has outpaced growth in personal income for the last five quarters (also shown in Figure 1), although the disparity in debt vs. income growth is not nearly as extreme as in 2007. Despite the growth in debt levels, the debt service ratio (“DSR”) remains low (10% vs. 13% in 2008), signaling a rise in consumers’ ability and willingness to pay off debts. However, the decrease in DSR is primarily due to the housing portion, which is 4% while the non-housing portion of the DSR has maintained and even increased slightly from pre-recession levels.
Figure 1: Household Debt Growth
1 Includes mortgages and HELOCs; data from Federal Reserve of New York Quarterly Report on Household Debt and Credit, May 2017. 2 Total required household debt payments to disposable income; data from The Federal Reserve Board.
Source: Accenture analysis on Federal Reserve of New York Report Quarterly Report on Household Debt and Credit, May 2017 https://www.newyorkfed.org/microeconomics/hhdc.html, The Federal Reserve Board data https://www.federalreserve.gov/releases/housedebt/, The Federal Reserve Bank of St. Louis data https://fred.stlouisfed.org/series/DSPIC96.
Underwriting standards remain high for mortgages, with over 60% of mortgage originations in the past quarter having credit scores of over 760 compared to 36% in Q3 2008. While borrowers and lenders remain cautious regarding housing debt, the level of subprime lending in non-housing debt (i.e., student loans, auto loans, credit card loans, etc.) has increased in recent years. As shown in Figure 2, subprime auto loan origination have surpassed pre-crisis levels and subprime credit card originations are also increasing. While overall delinquency rates have improved noticeably since the recession, auto loan performance has experienced some deterioration in the last 12 months and credit card delinquencies and charge-off rates are gradually increasing. Student loans, a topic that garnered attention during the presidential election, have also been growing rapidly due to the rising cost of tuition. Student loan volumes have more than doubled since 2007 and the credit quality is deteriorating; 11% of student loan debt was 90+ days delinquent in Q1 2017 compared to 7.5% in Q4 2007. Student loans now account for nearly 35% of non-household debt and 10% of total debt, so the debt burden and trends are concerning.
Figure 2: Non-Housing Loan Growth
1 Auto loan data is New York Fed Consumer Credit Panel/Equifax, credit card data is from CFPB. 2 Federal Reserve of New York Quarterly Report on Household Debt and Credit, May 2017.
Source: Accenture analysis on Federal Reserve of New York Quarterly Report on Household Debt and Credit, May 2017 https://www.newyorkfed.org/microeconomics/hhdc.html, and CFPB data https://www.consumerfinance.gov/data-research/consumer-credit-trends/credit-cards/borrower-risk-profiles/.
While total household debt has surpassed pre-recession levels, the credit quality and composition of the debt remain very different from the 2008 peak. Mortgages, which make up over two-thirds of total debt, are growing but credit quality remains strong. However, the growth in non-mortgage debt warrants monitoring as rising interest rates and the maturing of subprime loans could cause delinquencies and charge-off rates to continue to climb.
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