As a growing population financed more costly purchases, total debt rose. But income rose even faster in recent quarters.
By Wolf Richter for WOLF STREET.
Total household debt outstanding ticked up by $71 billion in Q3, or by 0.57%, from Q2, to $17.9 trillion, according to the Household Debt and Credit Report from the New York Fed today. Year-over-year, total household debt grew by 3.7%. Debt grew due to a mix of several factors:
- More borrowing capacity: Wage increases and the larger number of workers produced substantially higher overall personal income, which increased borrowing capacity.
- Higher prices: Homes, vehicles, and other goods and services that people finance got more expensive over the years — Home prices have exploded by about 50% since 2020; and consumer price inflation, as measured by CPI has surged by 22% over the same period, and those who borrowed to purchase homes and other things had to finance much larger amounts, but they had more income to do so.
All categories – mortgages, HELOCs, auto loans, credit cards, other revolving credit, and student loans – increased quarter-to-quarter and year-over-year. We’ll get into the details of each category in a series of separate articles over the next few days. Today, we look at the overall situation, along with delinquencies, collections, foreclosures, and bankruptcies.
The relative burden of household debt.
One of the ways to measure the overall burden of debt on households is to compare the debt levels to their income that is available to pay for debt service.
We use “disposable income” for that purpose. That’s income from all sources except capital gains; so income from after-tax wages, plus from interest, dividends, rentals, farm income, small business income, transfer payments from the government, etc. This is essentially the cash that consumers have available to spend on housing, food, cars, debt payments, etc. And what they don’t spend, they save.
Disposable income grew by 0.8% in Q3 from Q2, and by 5.5% year-over-year, according to data from the Bureau of Economic Analysis. So quarter-over-quarter, disposable income rose at the same pace as total consumer debts, and the burden of the debt remained the same; while year-over-year, disposable income rose nearly 2 percentage points faster than debt, and year-over-year the burden declined.
The ratio of 82% in Q3 was historically low, bested by only a few quarters during the free-money-stimulus era that had briefly inflated disposable income beyond recognition.
So the aggregate balance sheet of consumers is in good shape – the heavily leveraged entities in the US are the federal government and businesses, not consumers.
But in the runup to the Financial Crisis, consumers were mightily overleveraged, with debt-to-disposable-income ratios exceeding 115%, and then the leverage blew a fuse. Our Drunken Sailors, as we’ve come to call them lovingly and facetiously, have learned a lesson and have become a sober bunch, most of them, not all.
Serious delinquencies form a frying-pan pattern.
A small portion of our Drunken Sailors is always in trouble, they have subprime credit scores because they’ve been late with their payments, have defaulted on their obligations, etc. Subprime doesn’t mean “low income,” it means “bad credit,” and goes across the income spectrum. They’re a relatively small portion of consumers. And they’re always in flux: Some people get into trouble, and their credit scores drop to subprime, while others are working their way out of subprime as they cure their credit problems.
But the vast majority of our Drunken Sailors are keeping their credit in decent to excellent shape.
Household debts that were 90 days or more delinquent by the end of Q3 remained unchanged for the third month in a row, at a historically low 1.8% of total balances outstanding, lower than any time before the free-money-era of the pandemic.
The drop during the free-money era and then the climb back to what are still historically low levels forms what we’ve been calling a frying-pan pattern that is now cropping up a lot in the world of debt problems:
Foreclosures form frying-pan pattern.
There were 41,520 consumers with foreclosures in Q3, down from 47,180 in Q2, and compared to 65,000 to 90,000 in the years 2017 through 2019. Outside of the free-money and mortgage-forbearance era during the pandemic, which reduced the number of foreclosures to near zero, there was never a period in the data with fewer foreclosures.
And this frying-pan pattern makes sense: After three years of ballooning home prices, most homeowners, if they get in trouble, can sell their home for more than they owe on it, pay off the mortgage, and walk away with some cash, and their credit intact. It’s only when home prices spiral down for years, combined with high unemployment rates, that foreclosures become a problem.
Third-party collections not even in a frying-pan pattern.
A debt goes to a collection agency – the third party – after the lender has given up on the delinquent loan, has written it off, and has sold the account for cents on the dollar to a company that specializes in squeezing debtors until they cough up some money.
The percentage of consumers with third-party collections dipped to 4.60%, a new record low in the data:
Consumers with bankruptcies form frying-pan pattern.
The number of consumers with bankruptcy filings dipped to 126,140 in Q3, lower than any time before the free-money era. In Q2, there were 136,180 consumers with bankruptcy filings. In 2017-2019, during the Good Times before the pandemic, the number of consumers with bankruptcy filings ranged from 186,000 to 234,000, which had been historically low.
And the frying-pan pattern crops up again, this one with a short and low burn-your-fingers handle.
We’re going to discuss the details of housing debt, credit card debt, and auto debt in separate articles over the next few days. So stay tuned.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Much is written about medical debt, and I am curious as to how much medical debt as a specific category such as student debt, housing, auto and credit card debt influences overall consumer health. It has been estimated that medical debt contributes to 40 to 60% of personal bankruptcies. An article from the KFF Health System Tracker offers useful information,
htps://www.healthsystemtracker.org/brief/the-burden-of-medical-debt-in-the-united-states/ .
The information presented is based in part on surveys circa 2021 and includes data from the Consumer Financial Protection Bureau (CFDB) which estimates that $88 billions in medical debt is reflected in credit reports, and Census Bureau’s Survey of Income and Program Participation (SIPP). One estimate is that by the end of 2021 there was $220 billions of medical debt although the total could be masked by medical debt on credit cards or debt owed to family members.
The KFF report includes stratification of debt by amounts and patient ages. A large share of total medical debt is held by a small share of people. 6% of U.S. adults owed more than $1,000, 2% owed more than $5,000 and 1% owed more than $10,000. 0.3% of adults accounted for more than half of total medical debt. This reflects the cumulative expense of chronic disease. I would add that catastrophic illnesses such as cancer can bankrupt you.
It occurred to me that the young age of recent migrants might mitigate against higher individual medical use and hence debt although the KFF article includes data on obstetrical debt. Low skilled and hence low wage migrants in aggregate could result in increased costs to the health system as there are reports of stressed hospital systems in high migrant areas.
1. “I am curious as to how much medical debt as a specific category”
Much of the medical debt is INCLUDED in credit card debts and other revolving debts, such as personal loans, because that’s how people pay for it, and therefore is included in the data here.
2. “…has been estimated that medical debt contributes to 40 to 60% of personal bankruptcies.”
RTGDFA, I gave you the chart of personal bankruptcies. SO you can see how much of a problem that is, LOL. So here it is again:
House prices increased by 50% but it wasn’t income that supported the home prices, it was artificially low interest rates. Now those people are stuck in the homes they bought. Many were first time home buyers promised by real estate agents that as their families grew they could get another home….. well…. Unless the Fed does another massive QE, I don’t see that happening.
Great data presentation… thanks! I’m looking forward to the further discussion of household debt categories, detail and analysis.
It would be equally interesting to see how household debt fits into the larger total national debt picture: federal and state debt; corporate debt; household debt; financial services debt. I used to see charts tracking total debt to GDP, which figure had doubled over several decades, but don’t see those stats quoted much anymore.
Are rising total debt to GDP datapoints worthy of trend analysis?
So why is the Fed dropping rates?
Corporate and. Government debt?
Once again the fix is in at the Fed to bail out companies
The Fed dropped the rates because its measure of inflation was/is below 3% and its rates were at 5.5%, and now are at 4.75%, and because the labor market data went into a down-spiral over the summer. The down-spiral has been revised away. But short-term interest rates substantially above inflation rates is a good place to be.
What we had between 2008 and 2020 were inflation rates of 1% to 2.5% and interest rates mostly near 0%, with two years of higher rates of up to 2.5%, still only matching inflation at peak rate, not exceeding it. So that was bad. In 2021 through early 2022, we had lots of inflation shooting toward ultimately 9% and near-0% interest rates. That was really bad.
You have seen the government debt to GDP chart here many times.
In terms of “consumer debt to GDP,” it’s going to look similar in shape to “consumer debt to disposable income” above because GDP and disposable income grow roughly in parallel.
Here’s the government’s mess:
I’m struggling to reconcile this, rather positive, debt data, with the fact that so many people claim to be struggling.
Insurance and health care are still rising, food and autos seem to have leveled off (where I live) or come down a little.
The chart shows people are not borrowing more relative to their income to meet their needs. Disposable income is up.
I don’t understand.
Could it be the higher level of complaints/visibility for that population, in the age of social media? People not struggling are not appearing in that space, not attracting media attention as much. I guess in a statistics sense, how representative is that sampling?
Old Engineer
People are pissed off about higher prices. These prices piss me off, and we can afford them no problem. Americans are not used to seeing surging prices. We (me) are feeling like we’re getting ripped off on a daily basis. 2021-2023 was an inflation shock. Now inflation (a rate of change) is lower, but prices are still high, and incomes have risen especially at the lower end of the wage scales. But those high prices and new price increases really piss people off, and they’re in a foul mood. People HATE HATE HATE inflation and high prices, even if they can easily afford them. And so they complain about the economy.
Median household income in the US is $80,000. Meaning that HALF of the households make over $80k a year. And of the half that makes less than $80k a year, lots of them make $60k-plus a year.
And so people have money to spend, and they have relatively little debt, 65% of the households own their own home, 40% of them don’t even have a mortgage, and they’re spending a lot, and they’re STILL saving quite a bit. And they’re still pissed off about the high prices.
Income disparity has widened. These values are aggregate.
Or maybe wealth disparity is more accurate?
You will likely come to understand when you analyze where the “fact” that “so many people are struggling” came from.
We really are living in the best of times since WWII that I can recall.
Disposable income is up and disposable income as a percentage of debt is lower.
However that doesn’t mean people don’t feel financial strain, just not enough to incur debt.
It’s possible people became more conscious of debt but I have my doubts human nature changes that easily.
Or I could be interpreting the definitions Wolf gave very incorrectly…or the other plausible options is that most people are doing fine and the squeaky wheel is just more easily heard
People are pissed off about higher prices. These prices piss me off, and we can afford them no problem. Americans are not used to seeing surging prices. We (me) are feeling like we’re getting ripped off on a daily basis. 2021-2023 was an inflation shock. Now inflation (a rate of change) is lower, but prices are still high, and incomes have risen especially at the lower end of the wage scales. But those high prices and new price increases really piss people off, and they’re in a foul mood. People HATE HATE HATE inflation and high prices, even if they can easily afford them. And so they complain about the economy.
Median household income in the US is $80,000. Meaning that HALF of the households make over $80k a year. And so people have lots of money to spend, and they have relatively little debt, 65% of the households own their own home, 40% of them don’t even have a mortgage, and they’re spending a lot, and they’re STILL saving quite a bit. And they’re still pissed off.
I agree with you. According to the Republican messaging, this is the worst economy any nation has ever seen, certainly since the Middle Ages. Wolf’s numbers must be wrong, that’s all. His charts are probably upside down.
Now ain’t that some biting sarcasm!
Don’t worry. The economy will be in the best shape ever, starting from the end of January. Known pattern.
LOL! I think you are right about one thing. The phrase: “the data is wrong” is a phrase we are going to be hearing a lot in the future.
40% of middle class renter households are burdened by costs according to census bureau data. Up 20% since 2019…Just one group but there are lots of people not doing well. The idea people are making it up is silly.
Look up what they mean by “burdened” — don’t just throw that word around like a lump of clickbait manipulative bullshit.
So let me help. “Cost burdened” in terms of rent is defined by the Census as spending 30% or more of their household income on rent.
In San Francisco, where 65% of the households are renters, and median household income is $137,000, rent burdened would mean a rent of $41,000 per year, or $3,400 a month (that’s a realistic rent in SF for a nice place). So then this “cost burdened” household has $96,000 a year left to pay for bills, restaurants, school, Teslas, etc. Life is tough as a “cost-burdened renter. ” Even if they splurge on a $5,700 a month luxury rental that costs them 50% of their household income, they would still have $68,500 left a year to spend on other stuff.
30% is a bigger deal if a household makes $2,000 a month ($24,000 a year). So that’s below the “poverty” threshold in the US for a household of 3. And it’s not happening in places where that’s below the local minimum wage. It would be half of the minimum wage in SF, so not happening here. There are not many households that make only $24,000 a year. Median household income in the US is $80,000. That means 50% of the households make over $80,000 a year and 50% make less than $80,000. But humor me…
So if they spend 30% of $2,000 on rent = $600 a month, then that leaves them $1,400 a month to spend on other stuff. So that’s tougher even in a cheap place where $2,000 a month in household income by just one earner might be a little more common. Two earners making $2,000 a month each = $4,000 a month. Then they can rent something for $1,200 a month and have $2,800 a month left to spend on other stuff… so now that’s a little more common. But still a small portion, because half of the households make over $80,000 a year.
Wolf – in your response examples are you pre or post tax when talking household income?
Debt isn’t a measure of how people feel about the economy, it’s more a measure of how willing lenders are to stretch and bend their rules for people with poor credit. They were very willing in 2008, today, not so much.
The obvious reason people upset now is the 30%+ increase in the cost of almost everything since March 2020. People have very sensitive and long lived memories relating to consumer prices and inflation really pisses people off. If we have another bout of inflation like that, there will be hell to pay for whomever is leading the country yet again.
If it was just a Republican message and not reality for a lot of people, election results may have been different.
It’s all just data, but election data suggest people don’t feel as good as numbers show, right or wrong
Since most loans are bought or backed by the GSEs, here is some interesting info:
Debt To Income for purchased house loans at the GSE has been trending up YOY
How much can that ratio be? According to the FHA official site, “The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt.” Conventional loans are usually 28% and 36%.
• In the 1950s, FHA had an average DTI of 15%; in 2023, this has now risen to 31%.
• By allowing higher DTIs, FHA constantly pushes up home prices in a supply-constrained market. This is indicated by the long-term trend during sellers’ markets that fastest HPA growth rate is at the low end.
There is an other metric called HDTI. This includes the property tax and insurance in the mortgage payment DTI calculation. Freddie and Fannie are sitting at 38, up from 33 ten years ago. But FHA is at 46%!
46% means you do not have a lot of wiggle room if you do not have an ample amount of savings when an emergency comes up like a big medical bill, car repair, job loss, etc.
I guess one could always tap Home Equity which has ballooned in value?
At 46%, one is house poor unless your income in extremely high, high enough that the tax burden at that income also ceases to really hurt your lifestyle much, if at all.