WSJ: U.S. Household Debts Hit Record High in First Quarter

By Ben Leubsdorf

The total debt held by American households reached a record high in early 2017, exceeding its 2008 peak after years of retrenchment in the face of financial crisis, recession and modest economic growth.

The milestone, announced Wednesday by the Federal Reserve Bank of New York, was a long time coming.

Americans reduced their debts during and after the 2007-09 recession to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, looking at data back to the end of World War II, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”

In the first quarter, total debt was up 14.1% from that low point as steady job gains, falling unemployment and continued economic growth boosted households’ income and willingness to borrow. The New York Fed report said total household debt rose by $149 billion in the first three months of 2017 compared with the prior quarter, or 1.2%, to a total of $12.725 trillion.

“Almost nine years later, household debt has finally exceeded its 2008 peak, but the debt and its borrowers look quite different today,” New York Fed economist Donghoon Lee said. He added, “This record debt level is neither a reason to celebrate nor a cause for alarm.”

The pace of new lending slowed from the strong fourth quarter. Mortgage balances rose 1.7% last quarter from the final three months of 2016, while home-equity lines of credit were down 3.6% in the first quarter. Automotive loans rose 0.9% and student loans climbed 2.6%. Credit-card debt fell 1.9%, and other types of debt were down 2.7% from the fourth quarter.

Americans' debt has returned to levels last seen before the recession in nominal terms, but the makeup of that debt has changed significantly. Change in total debt balance, by type, since its previous peak in 2008: The data weren’t adjusted for inflation, and household debt remains below past levels in relation to the size of the overall U.S. economy.

In the first quarter, total debt was 66.9% of nominal gross domestic product versus 85.4% of GDP in the third quarter of 2008. Balance sheets look different now, with less housing-related debt and more student and auto loans. As of the first quarter, 67.8% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were 73.3% of total debt. Student loans rose from 4.8% to 10.6% of total indebtedness, and auto loans went from 6.4% to 9.2%.

Mortgages continue to account for the majority of overall U.S. household debt, though student and auto loans represent a growing share of the total.  Mortgage lending to subprime borrowers has dwindled since the housing crisis in favor of loans to consumers considered more likely to repay. In the first quarter, borrowers with credit scores under 620 accounted for 3.6% of mortgage originations, compared with 15.2% a decade earlier. Borrowers with credit scores of 760 or higher were 60.9% of originations last quarter, versus 23.9% in the first quarter of 2007. Auto loans have remained relatively available to subprime borrowers, helping fuel the record vehicle sales of recent years as interest rates have been low. Some 19.6% of auto-loan originations last quarter went to borrowers with credit scores below 620, down from 29.6% a decade earlier. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations.

The share of debt considered seriously delinquent — at least 90 days late — is down from recession-era levels, but varies widely by type of loan. Some 4.8% of outstanding debt was delinquent at the end of the first quarter, little changed from late 2016, with 3.4% at least 90 days late, known as seriously delinquent. Seriously delinquent rates have climbed recently for credit-card debt, 7.5% in the first quarter, and auto loans, 3.8% last quarter, and remained high—11% last quarter— for student loans, according to Wednesday’s report.

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