In case you missed the newsflash, the 2017 household debt is now as high as similar levels in 2008 before the onset of the Great Recession. Does this mean we are headed for another recession in the coming months? Let’s digest the information provided by the Federal Reserve Bank of New York before jumping to conclusions.
Household Debt Has Been Slowly Rising
Household debt peaked in the 3rd quarter of 2008 at $12.68 trillion. American families reduced their total debt burdens for every quarter from the high water mark in 2008 until the second quarter 2013. The total amount of household debt surpassed the 2008 record in the first quarter 2017 with $12.73 trillion.
It’s not all bad news. The debt is 2017 household debt is held in different areas this time.
While no debt is good, it can indicate signs of a growing economy as the unemployment has dropped and incomes have risen. And, stricter lending requirements have helped assign credit to those with better credit scores that are less likely to default on their loans or skip monthly payments.
Home mortgage loans are still the most common form of household debt, but, it holds a slightly smaller percentage than in 2008 overall. Mortgages are currently 67.8% of the total 2017 household debt. In 2008, that number was 73.3%.
Perhaps more telling is that subprime mortgages (applicants with a credit score below 620), a primary driver of the 2008 mortgage crisis, are significantly lower. The rate has dropped from 15.2% to 3.6%.
Many people have wondered if student loan debt will be the next bubble to pop and cause an economic crisis. Student loan debt has increased greatly since the 2008 recession from 4.8% to 10.6% with $1.3 trillion in outstanding student loans.
According to the New York Fed report, student loan defaults also have the highest default rate at 11% of all forms of household debt.
Related: The Ultimate Guide to Refinancing Student Loans can help you negotiate manageable student loan payments.
Auto loans have also risen since 2008 from 6% to 9% of the total household debt amount. This is partially because a record number of new vehicles have been sold in recent years. While the total percentage is higher in nominal terms subprime borrowers only consist of 20% of the 2017 loan distributions compared to 30% in 2008.
Credit Card Debt
Credit card debt has also shrunk from $779 billion to $764 billion, although the default rate has risen in recent months. This is also encouraging news because many households in 2008 used credit cards as their last option to pay the bills in 2008 and also contributed to the credit crunch. Once these rates start rising more consistently, there will be more cause for concern.
Related: These 5 Credit Card Debt Repayment Strategies Can Help You Become Debt-Free Sooner!
The Debt to GDP Ratio Is Still Lower
The nominal amount of household debt is higher in 2017, but, the debt-to-U.S. GDP ratio is still lower. In 2008, the ratio was 85% of the GDP. That ratio has dropped to 67% in 2017.
If the economy slows or debt levels continue to increase quicker than economic growth, that ratio can increase. For now, it means there is more breathing room and the total debt amount can still increase. Although, hopefully, it won’t because it could mean a repeat of 2008 and 2009.
Will the 2017 Household Debt Cause a Recession?
It’s tough to say. The news isn’t encouraging as debt has risen, especially in the student loan sector. But, because the debt is being held by people with higher credit scores and default rates are still lower than 2008 levels, a recession might result from American households being $12.73 trillion in debt.
There are many variables that play into a recession. For now, the stock market is still bullish and short-term economic outlooks are mostly positive.
Long-term this debt can factor into saving for retirement as their money is paying off debt like student loans and mortgage loans. And when the next recession does arrive, it will be hard to determine how it will affect the unemployment rate, bank lending practices, and the stock market.
The best approach is to be cautiously optimistic regarding the 2017 household debt levels. Banks have more wisely lent money and credit this time around, but, it doesn’t mean their business models are “recession proof.”