The Financial Crisis at the Kitchen Table:
Trends in Household Debt and Credit
We find that the level of household debt, after a sustained period of increase, began to decline in 2008; aggregate delinquencies peaked at the end of 2009. Both figures – total debt outstanding and total delinquencies – have shown signs of stabilization in recent quarters.
In this paper, we describe results from a new dataset that allows high-frequency
monitoring of household liabilities, and describe trends in the data over both the long and short terms.
Recent trends in Consumer Indebtedness
Our data begin in 1999Q1, and from that point through 2008Q3 we observe substantial increases in consumer indebtedness.2 On March 31, 1999, consumers owed about $4.6 trillion to their creditors.
During the subsequent nine years, consumer indebtedness rose 170%, reaching $12.5 trillion at the closeof 2008Q3.
The driving force behind these changes was debt secured by residential real estate, which accounts for the great majority – over 80% in most periods - of household liabilities. Amounts owed on installment mortgages and home equity lines of credit (HELOCs) more than tripled, from $3.3 trillion to
$10 trillion over this period, accounting for $6.7 of the total $7.9 trillion increase in consumer liabilities.
Nonetheless, other consumer debt also rose sharply, nearly doubling from $1.3 trillion to $2.5 trillion.
Many factors were responsible for these increases, including rising populations, incomes, stock and house prices. Indeed, while consumer indebtedness – the liabilities side of the household balance sheet – was rising sharply, the Federal Reserve System’s Flow of Funds accounts indicate that assets owned by the household sector were growing as well, leaving consumers’ net wealth (the difference between the value of assets owned and liabilities owed) growing steadily over the period.
Since the close of the third quarter of 2008, US consumers have shed nearly a trillion dollars from their indebtedness, resulting in a decrease in the aggregate consumer debt balance from $12.5 trillion at its 2008Q3 peak to $11.6 trillion at the close of 2010Q3, the most recent quarter in the panel.
Total household debt has decreased by roughly 7.4 percent since its peak. Mortgage-related debts now account for 80% of the total debt, with the rest being composed of credit cards, auto loans and student loans. It is interesting to note that, despite the general decrease in debt, student loans have actually
increased by roughly 17 percent since overall consumer debt peaked in 2008Q3.
Along with the decrease in household debt, delinquency and defaults have increased rapidly with only modest signs of stabilization through September 2010. In 2005, delinquent balances accounted for only 4 percent of the total outstanding consumer debt balance, with serious delinquency, defined as 90 or more days late, accounting for only 2 percent of the total balance. However, these figures roughly tripled and quadrupled, respectively, accounting for 11.1 percent and 8.0 percent of the total balance as of the most recent quarter. It is interesting to see that the deterioration of household debt started as early as 2006, and accelerated from then through 2009Q4. One important fact is that the three most recent quarters of data show a modest reversal in the share of debt that is delinquent.