In the aftermath of the housing collapse, U.S. consumers did something they hadn’t done in years: they drastically reduced their debt loads. After peaking in 2008 at just over .5 trillion, household debt (the sum of mortgages, home equity lines of credit, auto loans, and credit card debt) was whittled down to under trillion by the second quarter of 2013. But that, apparently, is when the deleveraging stopped. Over the past two years, household debt has once again been on the rise. But here’s the good news: that uptick bodes well for the economy. Auto loans rebounded first in 2010, followed by credit cards in 2011, and, finally, mortgages in 2013. As of mid-2015, total U.S. household debt sat just under .5 trillion. But the encouraging news isn’t simply that borrowing is up.—it’s more about who, exactly, is doing the borrowing. To answer that question, Credit Suisse economists James Sweeney, Zoltan Pozsar, and Xiao Cui recently created a four-box matrix of U.S. borrowers. The first thing they did was split the country into two parts—on one side, the five bubble states that were hit hardest by the crisis (California, Nevada, Arizona, Florida, and Georgia), and on the other, the 45 that weren’t. Then they separated those groups into two parts again: prime borrowers (credit scores above 659) and subprime borrowers.
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Hal Levey considers the following as important: auto loans, credit cards, Credit Suisse, Debt, deleveraging, James Sweeney, mortgages, prime borrowers, U.S., World Affairs: Features, Xiao Cui, Zoltan Poszar
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In the aftermath of the housing collapse, U.S. consumers did something they hadn’t done in years: they drastically reduced their debt loads. After peaking in 2008 at just over $11.5 trillion, household debt (the sum of mortgages, home equity lines of credit, auto loans, and credit card debt) was whittled down to under $10 trillion by the second quarter of 2013. But that, apparently, is when the deleveraging stopped. Over the past two years, household debt has once again been on the rise. But here’s the good news: that uptick bodes well for the economy.
Auto loans rebounded first in 2010, followed by credit cards in 2011, and, finally, mortgages in 2013. As of mid-2015, total U.S. household debt sat just under $10.5 trillion. But the encouraging news isn’t simply that borrowing is up.—it’s more about who, exactly, is doing the borrowing.
To answer that question, Credit Suisse economists James Sweeney, Zoltan Pozsar, and Xiao Cui recently created a four-box matrix of U.S. borrowers. The first thing they did was split the country into two parts—on one side, the five bubble states that were hit hardest by the crisis (California, Nevada, Arizona, Florida, and Georgia), and on the other, the 45 that weren’t. Then they separated those groups into two parts again: prime borrowers (credit scores above 659) and subprime borrowers. The bank’s economists consider only one of the four resulting categories to be “good credits”—prime borrowers in non-bubble states. Everyone else, including prime borrowers in bubble states, is “challenged.”
While debt has been rising across the board, it’s been rising faster among good credits, who have taken on more new mortgage, car, and credit card debt than the other three groups combined. Car loans to good credits have increased by more than $150 billion since 2010, for example, compared to an increase of about $125 billion for challenged credits. Growth in credit card debt is more evenly distributed, with an increase of $35 billion to good credits and $25 billion to challenged ones. But the difference in mortgages, which account for 80 percent of total household debt, is stark–good credits have taken on approximately $225 billion in new mortgage debt since 2013, compared to less than approximately $25 billion for challenged ones.
As a result of that lopsided recovery, prime borrowers in non-bubble states now hold 75.2 percent of household debt, compared to 68.4 percent when borrowing peaked in the third quarter of 2008. In other words, tighter credit standards in the wake of the Great Recession have succeeded in improving the overall credit quality of outstanding household loans.
Within the challenged credit group, prime borrowers in bubble states are taking on more auto loans, credit card debt, and mortgages. Among subprime borrowers, auto loans and credit card debt are growing quickly, but mortgage activity is just starting to rise—and only among borrowers at the higher end of the subprime spectrum, with credit scores between 620 and 660.
While prime borrowers have increased their overall debt balances, subprime borrowers have not. That’s because many consumers are still dealing with foreclosures, whether they’re being sued by lenders or hounded by collection agencies. Credit Suisse’s economists say subprime debt balances will only rise after those homeowners finally settle their outstanding mortgage debts and loans become more accessible to borrowers with the lowest credit scores.
What this renewed enthusiasm for borrowing foretells, of course, is higher consumer spending. It’s just one more indication – along with faster job creation, higher labor income, and healthy retail sales – that consumer activity is finally returning to normal in the United States after an achingly slow recovery. “The return of credit growth, especially for those with low credit scores or in former housing boom areas, marks an important threshold (for) the U.S. recovery,” say the bank’s economists. U.S. GDP figures have been volatile over the past two years, with marked slowdowns in the first quarter followed by stronger growth later in the year. But the clearly positive trends in U.S. household borrowing and spending are reliable indicators that more growth lies ahead.