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Household Debt Falls, Student Loans Weigh Heavy

The U.S. economy has been growing at a glacial pace for the past four years. And, by almost all tellings, the overhang of debt from the pre-crisis years is a big part of the reason. Americans have been paying down debts and building up savings, not using additional income to buy more goods and services and fuel more economic growth.

So far, so good. But what’s really happening with household debt in the United States, and what does it augur for the future? The New York Fed’s quarterly report on household debt provides some of the best data. The second-quarter review was released Wednesday, and here is what we can discern from it:

Debt levels really are coming down. Total household debt fell $78 billion, or 0.7 percent, in the second quarter of 2013.

Since U.S. household debt peaked in the third quarter of 2008, Americans have reduced their burdens by $1.53 trillion, or 12 percent.

De-leveraging really is the story of the past few years. The shift is even more dramatic relative to the size of the overall economy. Household debt totaled 85 percent of gross domestic product in the third quarter of 2008, and is down to 67 percent in the second quarter this year.

Mortgage debt is where the action is. There has been plenty of attention paid to the role of credit card and student loan debt in weighing down Americans. But in the overall numbers, housing-related debt dwarfs them. Add the $7.8 trillion in outstanding mortgage debt and another half a trillion dollars in home-equity lines of credit, and it’s more than 75 percent of all household debt. Even more significant, it’s where all the movement is in the falling levels of consumer indebtedness.

All other forms of household debt are up slightly since the third quarter of 2008, while the decline in debt levels can be chalked up entirely to mortgages and home-equity loans.

All is not well with student loans. Of the major types of household debt, the rate of delinquent payments is highest among student loans, and the rate has risen over the past two years even as the proportion of people behind on their payments has fallen for most other types of debt.

It is a sign that high education costs combined with a tepid job market are causing new strain on people who financed school by borrowing. The proportion of seriously delinquent auto loans is lower than it was five years ago, and credit card and mortgage delinquency rates are only slightly higher. The student loan delinquency rate, though, has risen from 7.55 percent in the second quarter of 2008 to 10.9 percent in 2013.

The swings are biggest in the bubble states.

The decline in total household debt is most pronounced in some of the states where the biggest housing bubbles burst. There have been major declines in debt per person in Arizona, California, Florida and Nevada. In Nevada, home to an epic housing bubble, per-capita debt has fallen to $49,350 from $88,580, a $39,230 decline.

It is reasonable to assume that the decline in mortgage debt in states with housing bubbles — in no small part the result of foreclosures, short sales and restructurings — is a major part of the total decline in Americans’ debt.

Some of the bubble states are leading the pack on delinquencies. The rate of people who are more than 90 days behind on their mortgage obligations is dramatically different depending on where people live. In Nevada and Florida, the rates are 13.2 percent and 12.2 percent, respectively. By contrast, even in some economically troubled states, delinquency rates are much lower: Only 4.2 percent in Michigan and 3.2 percent in Arizona.

That suggests that even five years after the recession began and seven years after housing started dipping, it is still the extraordinary run-up in home prices of the past decade that drives debt delinquency today.