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Friday, December 09, 2022

Chartered: US consumer debt approaches $16 trillion

Chartered: US consumer debt approaches $16 trillion

According to the Federal Reserve (Fed), US consumer credit is approaching a record-breaking $16 trillion, Crucially, the fourth quarter of 2021 also saw the highest rate of growth in consumer credit since 2007.

This graphic provides context in the consumer credit situation using data from the end of 2021.

Housing Vs. non-residential loan

The following table contains the data used in the above graphic. housing loan covers the mortgage, while non-residential loan Covers auto loans, student loans and credit card balances.

Date housing loan
(USD trillion)
non-residential loan
(USD trillion)
total consumer credit
(USD trillion)
Q1 2003 5.18 2.05 7.23
Q2 2003 5.34 2.04 7.38
Q3 2003 5.45 2.10 7.55
Q4 2003 5.96 2.10 8.06
Q1 2004 6.17 2.13 8.30
Q2 2004 6.34 2.12 8.46
Q3 2004 6.64 2.20 8.84
Q4 2004 6.83 2.22 9.05
Q1 2005 7.01 2.19 9.20
Q2 2005 7.23 2.26 9.49
Q3 2005 7.45 2.35 9.80
Q4 2005 7.67 2.34 10.01
Q1 2006 8.02 2.36 10.38
Q2 2006 8.35 2.40 10.75
Q3 2006 8.65 2.46 11.11
Q4 2006 8.83 2.48 11.31
Q1 2007 9.03 2.46 11.49
Q2 2007 9.33 2.53 11.86
Q3 2007 9.56 2.58 12.14
Q4 2007 9.75 2.63 12.38
Q1 2008 9.89 2.65 12.54
Q2 2008 9.95 2.65 12.60
Q3 2008 9.98 2.69 12.67
Q4 2008 9.97 2.71 12.68
Q1 2009 9.85 2.68 12.53
Q2 2009 9.77 2.63 12.40
Q3 2009 9.65 2.62 12.27
Q4 2009 9.55 2.62 12.17
Q1 2010 9.53 2.58 12.11
Q2 2010 9.38 2.55 11.93
Q3 2010 9.28 2.56 11.84
Q4 2010 9.12 2.59 11.71
Q1 2011 9.18 2.58 11.76
Q2 2011 9.14 2.58 11.72
Q3 2011 9.04 2.62 11.66
Q4 2011 8.90 2.63 11.53
Q1 2012 8.80 2.64 11.44
Q2 2012 8.74 2.64 11.38
Q3 2012 8.60 2.71 11.31
Q4 2012 8.59 2.75 11.34
Q1 2013 8.48 2.75 11.23
Q2 2013 8.38 2.77 11.15
Q3 2013 8.44 2.85 11.29
Q4 2013 8.58 2.94 11.52
Q1 2014 8.70 2.96 11.66
Q2 2014 8.62 3.02 11.64
Q3 2014 8.64 3.07 11.71
Q4 2014 8.68 3.16 11.84
Q1 2015 8.68 3.17 11.85
Q2 2015 8.62 3.24 11.86
Q3 2015 8.75 3.31 12.06
Q4 2015 8.74 3.37 12.11
Q1 2016 8.86 3.39 12.25
Q2 2016 8.84 3.45 12.29
Q3 2016 8.82 3.54 12.36
Q4 2016 8.95 3.63 12.58
Q1 2017 9.09 3.64 12.73
Q2 2017 9.14 3.69 12.83
Q3 2017 9.19 3.77 12.96
Q4 2017 9.32 3.82 13.14
Q1 2018 9.38 3.85 13.23
Q2 2018 9.43 3.87 13.30
Q3 2018 9.56 3.95 13.51
Q4 2018 9.53 4.01 13.54
Q1 2019 9.65 4.02 13.67
Q2 2019 9.81 4.06 13.87
Q3 2019 9.84 4.13 13.97
Q4 2019 9.95 4.20 14.15
Q1 2020 10.10 4.21 14.31
Q2 2020 10.15 4.12 14.27
Q3 2020 10.22 4.14 14.36
Q4 2020 10.39 4.17 14.56
Q1 2021 10.50 4.14 14.64
Q2 2021 10.76 4.20 14.96
Q3 2021 10.99 4.24 15.23
Q4 2021 11.25 4.34 15.59

Source: Federal Reserve

Home Loan Trends

Home prices have experienced upward pressure since the start of the COVID-19 pandemic. This Case-Shiller is evidenced by the US National Home Price Index, which has increased 34% since the start of the pandemic.

There are various epidemiological effects driving this increase. For example, material like wood has seen a huge increase in cost. We covered this story in a previous graphic showing how many homes can be built with $50,000 worth of lumber. In most cases, these higher costs are passed on to the consumer.

Here’s another important factor mortgage rate, which has fallen to the lowest level ever in 2020. When rates are low, consumers are able to borrow larger amounts. This increases the demand for homes, which drives up prices.

Ultimately, higher home prices translate into more mortgage debt being made by families.

no need to worry though

Economists are of the view that today’s housing loans are not a cause for concern. This is because the quality of borrowers is much stronger than it was between 2003 and 2007, in the years of the financial crisis and subsequent housing crash.

In the chart below, subprime borrowers (with credit scores of 620 and lower) are represented by red-shaded bars:

Mortgage Origination By Credit Score

We can see that subprime borrowers today represent very little (2%) of total originations compared to the period between 2003 and 2007 (12%). This suggests that American homeowners are, on average, less likely to default on their mortgages.

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

Year Mortgage payment 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 is true that Americans are less burdened with their mortgages, we must acknowledge the reduction in mortgage rates that occurred over the same period.

Now with the Fed raising rates to quell inflation, Americans can see their mortgages eating up a large portion of their paychecks. In fact, mortgage rates have already risen for seven weeks in a row.

Trends in Non-Residential Consumer Lending

The key stories in non-residential consumer loans are: student loan And auto loan,

The former category of credit has grown significantly over the past two decades, with growth slowing during the pandemic. This can be attributed to the COVID relief measures, which have brought down the interest rate temporarily. direct federal student loans up to 0%.

Additionally, these loans were placed in forbearance, meaning 37 million borrowers are not required to make payments. By April 2022, the value of these forgiven payments has been reached $195 billion,

During the pandemic, very few direct federal borrowers have made voluntary payments to reduce their loan principal. When payments finally resume, and a 0% interest rate is returned, economists believe crime could increase significantly.

Auto loans, on the other hand, are following a similar trajectory as mortgages. Global chip shortages have pushed up prices for both new and used cars, disrupting production across the industry.

To put it in statistics, the average price of a new car has climbed above $35,600 In 2019, to finish $47,000 today. Over the same time frame, the average price of a used car has increased by $19,800above it $28,000,

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