NY Fed Houusehold Debt and Credit Report infographic

Record US Household Debt, Falling Savings and More Financial Red Flags

400 300 Charles Weeks

I know I am beginning to sound like a broken record, but congratulations ’Merica, you have once again hit a new household debt record of $12.95 trillion, as reported by the Federal Reserve Bank of New York in its quarterly US Household Debt and Credit Report.

It has been more of the same since the last time I wrote about our credit and savings. The Federal Reserve Bank of St. Louis issued its latest report on our savings rate and it fell to 2.4%. So, while our household debt balloons our personal savings are declining. This makes total sense because the cost of carrying ever-increasing household debt leaves us with less cash to save.

These are red flags and if the trend continues, our nation will once again find itself in a financial bind. So what comprises our household debt? Here is the breakdown of what we owe and on what:

House Debt, $9.19 Trillion

House debt is arguably the “best debt” because it reflects the debt incurred to finance the purchase of a home. Hopefully, that home is an investment that appreciates in value over time. There is also the added benefit of mortgage interest deductibility, an advantage that has been somewhat muted by the recent passage of tax reform.

House debt increased ever so slightly month-over-month (MoM) – by just .60% – but if you look over the past decade it has fallen 3.82%. This is due to balances being paid down while new homes are not being purchased at a similar rate, combined with a sharp decline in home equity loan balances, which fell more than 29% during that time frame.

New York fed data shows that mortgage debt is by far the largest category of U.S. household debt.

New York Fed data shows that mortgage debt is by far the largest category of U.S. household debt.

Credit Debt, $808 Billion

Credit debt, which consists of high-interest debt used to finance the purchase of goods that are consumed with zero remaining value, is arguably the worst kind of debt.

These balances have increased MoM, but are down a little more than 1% since a decade ago. I don’t know if we really want to be comparing our personal finance behavior to that time period, though, considering that the third quarter of 2007 was just before the stock market peaked and the bear market began.

Graphic from the New York Fed shows flow into serious deliquency (90 days or more from Q2 to Q3 of 2017.

Graphic from the New York Fed shows flow into serious delinquency (90 days or more from Q2 to Q3 of 2017.

Household Debt Delinquency Rates

A good way to look at whether we are becoming strained from our credit card debt burden is by examining 90-day delinquency rates. These increased slightly from last month and sit at 7.47% of balances. It’s interesting to note that this is 20% below where our 90-day delinquency rates stood in the third quarter of 2007.

While this may seem like good news, there is some bad news in the data. The number of those considered newly 90-day delinquent has been creeping up month over month with an increase most recently of 4%. We are moving in the wrong direction.

Auto Debt, $1.21 Trillion

I would make the argument this is the second worst kind of debt. You are financing the purchase of a depreciating asset, and usually you’re borrowing for a term greater than your expected use of the vehicle.

In a previous post, I described how much more in interest you pay when extending from a four-year loan to a seven-year loan.

The real issue with extended financing is that it exacerbates over time. When you trade your car in you will be underwater, meaning that you owe more than it is worth, and you will roll that amount into new financing over another extended-term loan, making your situation that much worse. Unless the debt spiral is broken, eventually you will be paying Mercedes Benz type payments to drive a Ford Pinto.

Unfortunately, this is one debt balance that has been increasing, quickly. Month over month auto loan balances grew close to 2%. Even more telling: compared with a decade ago, these balances are up 48.29%! Now what the heck happened here? Here’s one theory.

When banks figured out that had become much harder to loan you money to buy a house because lending standards had become so restrictive, they had to figure out another area where they could make money financing purchases. Voila!

Unfortunately, this area of lending is showing some danger signs with 90-day delinquencies up 1.28% month over month. When compared to 10 years ago they are up a whopping 43.84%, ouch!

Those entering 90-day delinquency are up 2.16% from last month, so again we are trending the wrong direction.

Student Loan Debt, $1.35 Trillion and Growing Fast!

They always say the first trillion is the hardest. In 1965 the Higher Education Act was signed into law, allowing students to borrow money to pay for college. It took until about midway through 2013 for us to incur balances of $1 trillion. Since that time it has taken a little more than four years to add another $357 billion.

The earliest data given by the New York Fed shows balances of $241 billion in the first quarter of 2003. In a quick 10 years, we were at $986 billion, an increase of more than 300%. Unfortunately, this just continues to get worse. Month over month our balances grew at almost 1%, and over the past decade balances grew by more than 156%.

The 90-day delinquency rate stands at 11.17%, which actually fell from last month, down .45%, but from 10 years ago it’s up more than 47%. Newcomers to the 90-day delinquent club are down almost 1% from last month, but again, from 10 years ago they are up 25%.

While 11.17% of the student loan market being 90 days delinquent or greater seems pretty bad in itself, these words from the New York Fed send shivers up my spine:

“These delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment or in grace periods and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle, delinquency rates are roughly twice as high.”

Graphic from the New York Fed shows percentage of household loans in deliquency (90 days or more) since 2003.

Graphic from the New York Fed shows the percentage of household loans in delinquency (90 days or more) since 2003.

Student loan debt, if used properly, allows an individual to borrow money to increase their lifetime earnings. Studies have shown that the median annual earnings of college graduates outpace those of high school graduates by more than $17,000. However, and this is a big however, if you borrow too much to obtain this education and your wages aren’t great enough to pay it back quickly, it doesn’t matter. The higher earnings are offset by the massive interest expense you pay over your lifetime.

We need to do better for ourselves and our children and choose our colleges and borrowing amounts more wisely. You should not borrow to go to a college with annual tuition of $60,000 per year if your likely lifetime earnings will be $50,000 per year.

Bottom Line

Debt can be a useful tool when used correctly, but if used improperly, it can be dangerous. We end up slowly digging a hole that can be painful, if not impossible to crawl out of.

As we can see from our ballooning debt levels and falling savings level, we are in the process of digging that hole. The question is how deep are we, and can we crawl out?

If you are interested in reviewing the data I used for this post from the New York Fed you can find it here at the Center for Microeconomic Data Data.

Charles Weeks
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Charles Weeks

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