by Umar Farooq
We are moving toward an unpleasant milestone set in 2008 – a record amount of household debt. The New York Fed expects household debt to reach its previous 2008 peak sometime this year. The February 2017 Quarterly Report on Household Debt and Credit by New York Fed reports that the collective household debt in U.S. has reached $12.58 trillion, an increase of $266 billion from the third quarter. For the year, household debt increased by $460 billion which is the largest increase in almost a decade. This indicates that the debt loads of Americans are once again reaching the 2008 levels, when total consumer debt reached a record high of $12.68 trillion.
Mortgage balances make up the bulk of household debt and ended the year at $8.48 trillion. However, growth in non-housing debt, which includes credit card debt and student and auto loans, are key factors fueling the rebound in debt. Student loan debt balances rose by $31 billion in the fourth quarter to a total of $1.31 trillion, according to the report. Auto loans jumped by $22 billion as new auto loan originations for the year climbed to a record high. Credit card debts rose by $32 billion to hit $779 billion.
Delinquency rates were roughly stable in the last quarter of 2016, with a small uptick in severely derogatory balances offset by a modest improvement in 30 days delinquent balances. As of December 31st, 4.8% of outstanding debt was in some stage of delinquency. Of the $607 billion of debt that is delinquent, $412 billion is seriously delinquent (at least 90 days late or “severely derogatory”). About 204,000 consumers had a bankruptcy notation added to their credit reports in 2016Q4, 4% fewer than in the same quarter last year and a new series low.
“While a mortgage meltdown seems unlikely, student loan debt may be the source of the next dangerous bubble. It increased by $31 billion in the fourth quarter of 2016 to reach $1.31 trillion, a staggering sum that many graduates are in no position to repay. Without the support of recent graduates to buy starter homes, it will be difficult for the housing market to reach full potential – shifting the more unsustainable debt toward student loans and credit cards. Credit card and auto loan debts were rising at faster percentages in Q4 2016, with credit card balances increasing by $32 billion to reach $779 billion and auto loan debt rising by $22 billion to $1.16 trillion. Thus, the real question: Are people generally living beyond their means once again, or simply incurring more debt and managing it wisely? That answer will be revealed over the next several years.” huffingtonpost
Conclusion is that it’s not where you are that matters, it’s the direction you are headed or soon will be that’s significant. Given the rise in subprime auto loans and the extensive growth in student debt, this is probably about as good as it gets.
by Umar Farooq