Household Debt Levels Recovered, Composition Shifts

According to the Federal Reserve Bank of New York report, household debt has returned to its previous peak level. Since the recession’s end, consumer installment loans have grown faster than real-estate secured debt and has been shown to be rising faster than household income as well. At the same time however, transition rates into serious delinquency are higher on consumer installment loan types than on real-estate secured loans.

The Household Debt and Credit report, released on a quarterly basis by the Federal Reserve Bank of New York, reported that the total outstanding amount of household debt reached $12.73 trillion in the first quarter of 2017, 1.2 percent above its level in the fourth quarter of 2016, $12.58 trillion, and 3.9 percent above its level from one year ago. The total amount of outstanding household debt has now surpassed its previous peak reached in the third quarter of 2008, $12.68 trillion.

However, as the chart above illustrates, the recovery in household debt overall, reflects a surge in consumer installment loans, which account for 29 percent of total household debt. Meanwhile, the total outstanding amount of mortgages and HELOCs, which represents 71 percent of total household debt, continues to lag. The figure above measures the outstanding amount of each loan category and compares each quarter relative to it’s outstanding amount in the third quarter of 2008, the quarter when household debt overall reach its last peak.

A similar exercise is applied to the components of consumer installment debt, student loans, auto loans, credit cards and other consumer installment debt. According to the data dictionary, the “Other” category includes Consumer Finance (sales financing, personal loans) and Retail (clothing, grocery, department stores, home furnishings, gas etc.) loans. As the figure above shows, the growth in consumer installment debt since the recession reflects an expansion in both student loans and auto loans. Although the trend in auto debt outstanding since the recession was cyclical, the growth in student loans continued, unabated by the last recession.

The rapid growth in consumer installment debt motivates questions about loan quality. Additional information provided by the release indicates that loan quality on consumer installment loan products is worse when compared to real-estate secured loans. However, outright concern for the loan quality of some consumer installment products may not be warranted yet.

The figure above documents the trend in percent of outstanding loans that have transitioned into serious delinquency, 90 or more days past due or at least three consecutive missed payments, by loan type. While most loan products exhibited cyclical features around the most recession, rising during the recession and falling in the afterword, the serious delinquency transition rate on student loan debt fell in the early stages of the recession but rose in the latter quarters and through first few years of the recovery.

Currently, consumer installment loans have the highest serious delinquency transition rate. Although the serious delinquency rate on student loans is not rising, it remains at elevated levels. The serious delinquency transition rate for credit cards has been increasing in recent quarters but remains below rates in its, short, history. Auto loans have exhibited a continuous increase in its serious delinquency transition rate since 2014 and its current rate, 2.3 percent, is above its 2003 level of 2.2 percent, but it is also below its peak level of 3.5 percent.



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