While it does not contain any new information to those who track the monthly, G.19, consumer credit releases by the Fed, the quarterly NY Fed report on Household Debt and Credit Developments provides a convenient one-stop summary of quarterly changes in household finances. What the latest report issued this morning revealed, is that total US household debt jumped in Q4 driven by increases in credit card debt, auto and student loans, and a Q4 surge in mortgage originations, and as of December 31, 2016, stood at $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. For the full year 2016, total household debt rose by $460 billion, the biggest annual increase in a decade.
Total household debt has risen by 12.8% from its Q2 2013 trough, and is just $99 billion, or 0.8%, shy of its all-time peak of $12.7 trillion set in Q3 2008 just as the financial crisis was starting. At this rate household debt will set a new all time high some time in the first quarter. When measured as a percentage of GDP, total household borrowing today is 67% of nominal gross domestic product, compared with about 85% in 2008.
Mortgage balances, the largest component of household debt, increased during the fourth quarter by $130 billion, and stood at $8.48 trillion at December 31. Additionally, all types of non-housing debt balances grew in the fourth quarter, with a $22 billion increase in auto loan balances, $32 billion increase in credit card balances, and $31 billion increase in student loan balances.
According to Wilbert van der Klaauw, an economist at the New York Fed, “debt held by Americans is approaching its previous peak, yet its composition today is vastly different as the growth in balances has been driven by non-housing debt.”
The average household debt composition in a select group of states and the US in general, is shown in the chart below. As usual, California leads the pack.
Debt balances increased across all debt products, with a 1.6% increase in mortgage balances, a 1.9% increase in auto loan balances, a 4.3% increase in credit card balances, and a 2.4% increase in student loan balances this quarter.
While households shed nearly $1.5 trillion in housing-related debt between 2008 and 2013 through a combination of foreclosure and slow debt repayment, in recent years the trend has changed, and according to the report, in 2016 mortgage originations – measured as appearances of new mortgage balances on consumer credit reports and which include refinanced mortgages – were at $617 billion, the
highest level of originations seen since the beginning of the Great Recession. This trend, however, may be derailed by the recent jump in mortgage rates.
Yet despite the seeming bank generosity, it is worth noting that credit standards have continued to tighten in 2016: the distribution of the credit scores of newly originating mortgage loan borrowers tightened a bit, with the median score
for originating borrowers for mortgages increasing to 763; about 58% of new mortgages went to borrowers with the top credit scores, or over 760 during 2016, compared with an average of 54% in 2015, as banks seemed to focus on the most credit-worthy borrowers.
Additionally, in a troubling trend we point out every month, the biggest driver of household debt growth over the past decade has been the rise of student loans and auto loans. Where a decade ago there was less than $500 billion in student loans, as college tuition soared, the sum surpassed $1 trillion for the first time in 2013 and stood at $1.3 trillion in the fourth quarter. It is currently over $1.4 trillion according to more recent reports.
Then there are car loans: there were $142 billion in auto loan originations in the fourth quarter, making 2016 the highest auto loan origination year in the 18-year history of the data. Here too lending standards tightened, as 32% of dollars originated to borrowers with credit scores over 760 in the fourth quarter, compared to only 29% for the first 3 quarters of 2016.
Elsewhere, the aggregate credit card limit increased for the 16th consecutive quarter, with a 2.3% increase. Aggregate HELOC limits were roughly flat.
Finally, Delinquency rates were roughly stable in the last quarter of 2016, with a small uptick in severely derogatory balances offset by a modest improvement in 30 days delinquent balances. As of December 31st, 4.8% of outstanding debt was in some stage of delinquency. Of the $607 billion of debt that is delinquent, $412 billion is seriously delinquent (at least 90 days late or “severely derogatory”).
That said, we would take the chart below of seriously delinquent balances with a grain of salt: recall that one month ago, the US government admitted to fabricating student loan default data.
To summarize the key points:
- There were $617 billion in newly originated mortgages this quarter, the highest level seen since 2007Q3.
- Mortgage delinquencies were mostly unchanged, with 1.6% of mortgage balances 90 or more days delinquent at the end of 2016Q4.
- Delinquency transition rates for current mortgage accounts improved slightly, with 1.0% of current balances transitioning to delinquency, from 1.2% in 2016Q3. Of mortgages in early delinquency, 18% transitioned to 90+ days delinquent, while 37% became current.
- About 79,000 individuals had a new foreclosure notation added to their credit reports between October 1 and December 31st.
Student Loans, Credit Cards, and Auto Loans
- Outstanding student loan balances increased by $31 billion, and stood at $1.31 trillion as of December 31, 2016.
- 11.2% of aggregate student loan debt was 90+ days delinquent or in default in 2016Q42.
- Auto loan balances increased by $22 billion, continuing their steady rise. Auto loan delinquency rates deteriorated again, with 3.8% of auto loan balances 90 or more days delinquent on December 31, 0.2% above last quarter.
- Credit card balances increased by $32 billion, to $779 billion, while 90+ credit card delinquency rates were unchanged at 7.1%.
- Credit Inquiries
- The number of credit inquiries within six months – an indicator of consumer credit demand – declined from the previous quarter, to 171 million.
The full report can be found here.
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