Consumer Debt Outlook - June 2018

Highlights

  • American household debt is currently on pace to be $1 trillion above the peak debt level of 2008 by the end of this month. That figure has been increasing at a 3.4% annual rate and includes mortgage debt.
  • Total mortgage and consumer debt levels are on pace to reach $15.7 trillion at the end of the second quarter, versus $14.7 trillion 10 years ago.
  • Credit card debt, student loans and auto loans have increased by 45% over the past decade. Consumer debt (which excludes mortgages) is on pace to exceed $4 trillion by December 2018.
  • Mortgages weigh less on American households than they have in recent years, even though they comprise the largest amount of debt. As measured by a percentage of disposable income, outstanding mortgages comprise less of a liability.
  • Total student loan debt recently surpassed $1.5 trillion and comprises 42% of all consumer debt. That far exceeds the 27% share of debt credit card balances occupy. A decade ago, those percentages were reversed.
  • While nominal total debt levels now exceed 2008 levels, households are much better situated to handle debt then they were a decade ago. Mortgage balances currently are around 68% of disposable income, and credit card balances are less than 7% of income. In 2008, balances were as high as 98% and 10%, respectively.
  • One exception to the overall trend are millennials, who largely shoulder most of the growing student loan debt and are underrepresented in homeownership rates.

Household debt to surpass 2008 peak by $1 trillion

In the first quarter of this year, household net worth, as measured by the Federal Reserve Financial Accounts, reached $100 trillion for the first time. Assets — primarily financial instruments and real estate — gained more than $1.07 trillion in the first quarter, handily outpacing the additional debt Americans accumulated.

Nonetheless, liabilities have been steadily increasing in recent years. But unlike a decade ago, mortgages aren’t the culprit. It is non-mortgage-related debt, such as student loans, credit card debt and auto loans, that have been growing. By the end of the second quarter 2018, we’ll have $1 trillion more in household debt than we did in 2008 — and none of it is attributable to housing.

Since the third quarter of 2008, the peak of last decade’s housing bubble, mortgage-related household debt has actually fallen by 5.5%. Meanwhile, consumer credit — a collection of revolving credit and installment loans, has increased by 45%.

Credit card balances still below 2008 levels; student loan debt levels continue to balloon

Consumer credit is a collection of a number of household liabilities — auto loans, credit cards and student loans are the three largest types. Of the three, student loan balances are growing the fastest — they’ve risen 130% since the housing crisis began. Compare that with auto loans, which have risen a much more modest 39% in the past decade. Credit card balances are actually slightly lower than they were in 2008, and that’s before factoring in 10 years of inflation.

In other words, over the past decade, the burden of non-mortgage debt has shifted from credit card borrowers to student loan borrowers. Indeed, as the charts below show, credit card and student loans have switched places. In 2008, credit card debt comprised 40% of household liabilities and student loan debt made up 27%. Today, those shares are swapped — student loans make up 42% of the nation’s household debt, and credit cards are now only 28% of the share.

But no matter the mix, the trend is definitely more debt. We project that total consumer debt (excluding mortgage debt) will exceed $4 trillion by the end of 2018.

Income gains are mitigating the increase for most; millennials are an exception

Although total household debt has returned to 2008 levels, the difference in 2008 and today’s income and types of debt are significant.

Most important, mortgage balances as a percentage of disposable personal income has fallen from a high of 98% in 2008 to 68% as of the latest quarter. In other words, homeowners today, on average, have significant equity in their homes. Ten years ago, equity was virtually nonexistent.

Similarly, credit card debt, as measured as a percentage of income, has fallen by about 30% versus the levels they were at a decade earlier. Credit card balances represent about 6.6% of income as of the first quarter of 2018; a decade ago, it was nearly 9%.

At the other end of the spectrum, student loan borrowers are shouldering nearly 70% more than they were a decade ago, as student loans now represent 10.3% of disposable income, versus 6% a decade ago.

As millennials bear most of this student loan debt while remaining underrepresented in homeownership versus other age cohorts, the economic distress of millennials becomes much more understandable, at least on a relative basis, and relating specifically to debt burdens.