The New York Fed’s quarterly release of consumer lending data received more attention than usual this cycle thanks to a certain milestone. For the first time, overall U.S. consumer debt of $12.7 trillion exceeded the previous high established in late 2008, just as the extent of the Great Recession was becoming apparent.
Even at a high level, this statistic provides an opportunity to separate the “glass half full” types from the Negative Nellies. Does it mean our economy has finally recovered—or that we’ve simply created a new bubble for ourselves?
Probably neither, although a closer look at the data could provide pockets of support for either argument. If you like numbers nearly as much as I do, I encourage you to download the New York Fed’s deck and easy-to-navigate spreadsheet, both of which contain plenty of worthwhile nuggets.
Here’s my take on the high points.
Of the six underlying consumer debt categories, four remain well off their highs while two have grown—and one of those is a doozy.
First, the laggards:
• Home mortgages remain far and away the largest category of consumer borrowing, with $8.6 trillion outstanding comprising more than two thirds of total consumer debt.
This area remains more than 7% below its late 2008 high. It’s no secret that housing was overleveraged during the bubble, so remaining below that high point isn’t a bad thing.
Delinquencies are now in far better shape, and a view of mortgages by FICO score confirms that weak-credit individuals have essentially been squeezed out of the marketplace.
The new question is whether the pendulum has swung too far in the other direction. How much of the decline in home ownership rates stems from an inability for normally qualified borrowers to obtain credit as opposed to the lack of desire to buy, and how will this impact the next generation of homeowner culture?
Although mortgages remain an integral part of credit unions’ product mix, the answers to these questions affect more than the profit and loss statement.
• Home equity lines of credit (HELOC) are a pittance compared to first mortgages, and are far more volatile. This was the “piggy bank” mechanism through which homeowners used their price appreciation to fund temporary consumption.
With far fewer homes sitting well above the remaining mortgage balance—and fewer financial institutions willing to lend based on this more tenuous collateral—it’s no surprise that HELOC balances remain one-third off their highs.
There are prudent uses for home equity lending. But I’d venture to guess a solid third of the 2008 volume was not in that “prudent” category.
• Credit cards are perhaps the most interesting case. Down 12% from their peak, revolving card balances are, like mortgages, roughly halfway between their 2008 peak and 2013 valley.
Balances, however, do not correlate to credit card use which, following from a brief flat post-crisis period, has continued to increase at an annual 7-8% clip.
This means consumers have migrated toward “transacting” rather than “revolving,” which shows greater fiscal responsibility but also deprives credit unions of a leading revenue source.
• Student lending is the true outlier. Balances have tripled over the past decade, and it’s the one category that never slumped during the recession.
Though still a distant second at 10.6%, student loans are now the second-largest consumer debt category. In 2008, they were the smallest.
It’s probably the least profitable lending category for credit unions as well. If you’ve wondered why you see so many SoFi TV commercials offering refinancing, wonder no longer.
• Auto loans are the other big source of growth: up 44% from 2008’s level and a bright spot for credit unions, which tend to perform well in this category.
These loans peaked earlier before the crisis, bottomed out sooner, and have regularly established new record highs since 2013. Despite no signs of severe trouble, recent slowdowns in auto sales may indicate this category’s long run is near its end.
In short, U.S. consumers are more indebted than ever before, but spread across more consumers, more households (fewer of which own their domicile, for better or worse) and more GDP.
Household debt also is comprised differently, even as housing continues to drive the lion’s share.
The mortgage portfolio’s overall quality is demonstrably stronger than during the pre-recession bubble. The only significant warning flag involves student loan delinquencies, notwithstanding minor adverse auto lending trends.
While student debt obligations may become an anchor suppressing discretionary spending for some time, a severe reversal in the student or auto categories would have nowhere near the overall macro effect of 2008’s housing crisis.
Whether this is good or bad news for credit unions or the economy as a whole remains open to debate.
GLEN SARVADY is managing partner at 154 Advisors and senior payments expert with Best Innovation Group, a CUNA consulting partner. Follow him on Twitter via @154Advisors. His views do not necessarily reflect those of Credit Union National Association.