Tuesday , 21 March 2023

U.S. Consumer Debt Approaching A Record-breaking Level

According to the Federal Reserve, U.S. consumer debt is approaching a record-breaking $16 trillion [and today’s infographic]…provides context…using data from the end of 2021.

This version of the original article by Marcus Lu (visualcapitalist.com) has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

U.S. consumer debt approaches $16 trillion

Trends in Housing Debt

1. Higher Home Prices

  • …[According to] the Case-Shiller U.S. National Home Price Index, home prices have increased by 34% since the start of the pandemic [caused by:]
    • …the cost of materials such as lumber have seen enormous spikes…
    • lower mortgage rates, which fell to all-time lows in 2020, that enable consumers to borrow in larger quantities which increases the demand for home, which in turn inflates prices (ultimately translating into more mortgage debt being incurred by families).

2. Fewer Sub-prime Mortgages

Economists believe that today’s housing debt isn’t a cause for concern, however, because the quality of borrowers is much stronger (sub-prime borrowers only account for 2% today) than it was between 2003 and 2007 (12%), in the years leading up to the financial crisis and subsequent housing crash. The chart below shows subprime borrowers (those with a credit score of 620 and below) represented by the red-shaded bars:

Mortgage originations by Credit Score

3. Decline in the Household Debt Service Ratio

Economists have also noted a decline in the household debt service ratio, which measures the percentage of disposable income that goes towards a mortgage. This is shown in the table below, along with the average 30-year fixed mortgage rate.

Year Mortgage Payments as a % of Disposable Income Average 30-Year Fixed Mortgage Rate
2000 12.0% 8.2%
2004 12.2% 5.4%
2008 12.8% 5.8%
2012 9.8% 3.9%
2016 9.9% 3.7%
2020 9.4% 3.5%
2021 9.3% 3.2%
Source: Federal Reserve

While it’s true that Americans are less burdened by their mortgages, we must acknowledge the decrease in mortgage rates that took place over the same period but, now, with the Fed increasing rates to calm inflation, Americans could see their mortgages begin to eat up a larger chunk of their paycheck…

Trends in Non-Housing Consumer Debt

1. Student Loans

Student loan debt has grown substantially over the past two decades, with growth tapering off during the pandemic…attributed to:

  • COVID relief measures which have temporarily lowered the interest rate on direct federal student loans to 0% and
  • the 37 million borrowers not been required to make payments

When payments eventually resume, and the 0% interest rate is reverted, economists believe that delinquencies could rise significantly.

2. Auto Loans

…Both new and used car prices have risen due to the global chip shortage, which is hampering production across the entire industry:

  • the average price of a new car has climbed from $35,600 in 2019, to over $47,000 today…[while] the average price of a used car has grown from $19,800, to over $28,000.
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