Consumer Debt Outlook September 2018

The State of Consumer Debt 10 Years After the Great Recession

The American economy of the mid-2000s was built, and then collapsed, upon the residential mortgage market. Lenders offered loans in excess of a home’s value, and would-be owners took them up on the offer, either to “flip” the property in a matter of months or to continue using the home as a virtual ATM.

Ten years later, the housing market has returned to a relatively normal state, with mortgage levels at about 68% of incomes, versus a nearly 100% mortgage-to-income value ratio in 2008. Although there are some issues with an adequate housing supply, in general, mortgage lenders are relatively strict about to whom they will lend, and for what amounts.

But what about other types of consumer loans, such as auto loans, credit cards, personal loans and loans for education?

AUTOS

2008 level: $798.14 billion
2018 level: $1.13 trillion
Annualized percentage increase since 2008: 3.5%
Current annual rate increase: 3.1%

Auto loan borrowing levels have steadily increased since the Great Recession ended in the third quarter of 2009, echoing the increase in annual car sales in the U.S. from less than 10 million units annually in 2009 to more than 17 million units this summer. In addition, the length of time consumers are taking to repay their auto loans is also increasing, meaning that they’re paying more in interest relative to principal than in previous years.

REVOLVING DEBT/CREDIT CARDS

2008 level: $986.46 billion
2018 level: $1.00 trillion
Annualized percentage increase since 2008: 0.1%
Current annual rate increase: 4.5%

Credit card debt levels have barely budged since 2008, but the wild ride that consumers (and credit card issuers) went on in the interim is the real story. Between 2008 and 2011, card issuers tightened their lending standards and extended less credit to card borrowers. It wasn’t until 2011 that credit card balances started increasing, from a low of $790 billion to $1 trillion today.

STUDENT LOANS

2008 level: $626.6 billion
2018 level: $1.53 trillion
Annualized percentage increase since 2008: 9.3%
Current annual rate increase: 5.7%

At over $1.5 trillion, student loan debt is now the largest debt consumers carry that’s not related to housing. Nor are education loans a problem just for millennials. Increasingly, consumers are carrying student loan debt into their 40s and beyond. In fact, 35 percent of student loan borrowers are 40 or older, according to the Chronicle of Higher Education.

MORTGAGES

2008 level: $10.70 trillion
2018 level: $10.14 trillion
Annualized percentage increase since 2008: -0.5%
Current annual rate increase: 2.8%

The contrast between mortgage debt and other types of consumer debt is stark. Even though mortgage levels are still slightly lower than they were 10 years ago, they comprise the bulk of consumer debt. Currently, mortgage balances are growing at a rate that’s in line with historical pre-housing bubble levels.

Consumers will have more than $4 trillion in debt by the holiday season

As of July, Americans have a cumulative $3.88 trillion in non-mortgage debt heading into the holiday spending season. In previous years, we’ve added an average of $10 billion in the last five months of a calendar year since 2012. But with inflation increasing and unemployment at historic lows, we expect spending, especially on revolving debt (credit cards), to be especially robust in 2018, compared to previous years in last decade.

Another rate hike means debt levels will accelerate

As the Federal Reserve votes to increase the Fed funds target rate at the end of September, expect credit card APYs to go up in lockstep over the next two months. Currently, the average credit card APY is at 15.54%, but look to add another quarter-point to that figure around Thanksgiving.