US Household Debt at Record Levels. Another Crisis?!
US Household Debt last peaked in 2008 at $12.68 trillion. This came with housing debt peaking in the 3rd quarter and non-housing debt peaking in the 4th quarter. The US consumer then began a slow deleveraging process that lasted for nearly five years. Total US household debt bottomed out in the 2nd quarter of 2013 at $11.15 trillion. During that time, I and countless others wrote that the deleveraging would eventually help the consumer to rebound, but worried that the lessons of the dangers of high US household debt levels would be lost all too soon, and the debt bubble would re-inflate. It turns out we were right on both counts.
US Household Debt Over the Years
Source: NYFed.org
As the Federal Reserve Bank of NY reported in February of this year, total US household debt reached $14.15 trillion as of the 4th quarter of 2019. As you can see from the above chart, it doesn’t appear there’s an end in sight to the expansion of that debt.
The breakdown of the debt is interesting as well.
Housing debt has not reached its 2008 levels yet, but non-housing debt has grown by nearly $1.49 trillion in the last 12 years, rising from $2.71 trillion in 2008 to $4.2 trillion today.
Shockingly, student loan debt accounts for almost $1 trillion of that increase.
This increase in total US household debt has a lot of people worried that we may be on the brink of another crisis caused by this growing debt burden. But are they concerned for no reason? I believe they may be, so let me explain why I don’t think we are anywhere near as precariously positioned today as we were back in 2008. And let’s start with one of my favorite subjects, demographics.
US Household Debt Demographics
As I’ve written many times over the last 15 years, you ignore demographic trends at your own peril. It’s the sheer force, or lack thereof, of the American consumer doing what they do every day, spend money. In either growing or declining numbers spending money is the single most significant mover in our economy. It’s also the most important factor in our nation’s financial well-being. In 2008, there were roughly 300 million people in the United States. That means the total US household debt in that year was equal to $42,467 per person. Today, there are over 330 million people in the United States. So our current debt load per person is $42,879. An increase of a scant $412 per person over the last 12 years. Hardly a crisis by any stretch of the imagination.
But when we talk about debt, we have to talk about what it costs to service that debt, and that is where the picture of today’s US household debt levels changes for the better, dramatically.
A Real Estate and Interest Rate Refresher
Source: AdvisorPerspectives.com
Source: AdvisorPerspectives.com
Let’s take a trip back in time for a moment for a little real estate and interest rate refresher course. First of all, you can see in the chart above that the real-estate boom preceding the financial crisis began its meteoric rise in 1992/3 and didn’t peak until mid-2005. In that year, new single-family homes were selling at a rate of 1.25 million a year, and existing homes (the second chart) peaked simultaneously at a rate of 7.26 million.
This link will take you to a series of charts that illustrate the historical mortgage interest rates that were in effect during the housing boom years. It also has the interest rates that are currently in effect today. The difference is staggering. As recently as 1994, the average interest rate on a mortgage was 8.38%. However, if your credit wasn’t stellar, you could pay as much as 9.25%.
Today, the average 30-year mortgage interest rate is 4.25%. That’s less than half of what they were 25 years ago.
The Fed Cut Interest Rates
The federal reserve has stopped and subsequently reversed its policy of fed funds rate increases and just this week dropped the overnight rate by a full ½ percent. That means that these lower interest rates are not only likely to persist for the foreseeable future, but that they may even go lower in the weeks and months to come. Let’s take a look at how these rates are affecting the consumer trying to service the new record levels of US household debt.
Source: Fred.StLouis.org
As you can see in the chart above, US household debt service levels have dropped to historic lows as the federal reserve has dropped their overnight rate to landmark lows trying to combat the effects of the financial crisis of ’07-’09. Before the onset of the financial crisis, the average consumer was spending 13.25% of their disposable income, servicing their debt. Today, the average consumer is only spending 9.69% of their disposable income to service their debt, even though the total US household debt has now eclipsed the levels seen before the financial crisis.
Borrowing is Cheap
It’s not just the interest rate environment that has helped in easing the debt service burden, either. In the aftermath of the financial crisis, money was incredibly cheap to borrow, and businesses borrowed like there was no tomorrow to expand their operations using inexpensive and readily available funds. They needed to hire new people to help in the process, which meant the unemployment rate began to fall, and the economic activity picked up.
Unemployed to Financially Stable
This became a virtuous cycle, raising millions of people from the ranks of the unemployed and putting them on the path to financial health again. The demand for goods and services and the need for ever-larger numbers of people to create/deliver those goods and services put upward pressure on the annual pay for the overwhelming majority of gainfully employed American consumers.
Increased wages, and low-interest rates on the money they borrow to make purchases like homes and vehicles, has helped lower the burden of debt service for the average consumer while improving their standard of living at the same time.
US Household Debt, What’s the Outlook from Here?
So what’s the take away here? Unless the interest rates American’s have to pay on their debt increase by 30-40%, or they increase their overall level of indebtedness by 30-40%, they’ll more than likely be able to comfortably service their debt, and make good on the promises they’ve made to their lenders. And, as long as that’s the case, the virtuous cycle should continue. So don’t let the negative press about total US household debt fool you. As of right now, the US consumer is in pretty good shape!
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.
https://www.newyorkfed.org/microeconomics/hhdc.html
https://fred.stlouisfed.org/series/TDSP
https://www.newyorkfed.org/newsevents/news/research/2020/20200211
https://www.stlouisfed.org/on-the-economy/2019/october/consumer-debt-new-peak-depends
http://worldpopulationreview.com/countries/united-states-population/