In the past 10 years, private sector
leverage increased at a record pace, thanks largely to cheap mortgage credit.
In fact, since 2000, U.S. consumers have been spending more than they’ve been
earning, and piling up debt.
According to 2008 Federal Reserve data
cited in the Chicago Tribune:
- Mortgage debt now totals $10.5
trillion, up from $7.8 trillion in 2004.
- Revolving consumer debt, primarily
from credit cards, totals $957 billion, up from $800 billion in 2004.
- The average car loan has jumped to
$27,397, up from $24,888 in 2004.
Now, with the collapse of the housing
market, millions of consumers have begun making an effort to pay down their
loans, or at least avoid taking on more debt. In the first quarter of 2008,
household debt grew by just 3.5 percent, compared to 6.1 percent in the
previous quarter. This is the slowest rate of growth since the first quarter
of 1993.2
The growth of home mortgage debt (which
includes home equity loans) declined to an annual rate of 3 percent. That’s
less than half the pace of 2007, and the smallest increase since the second
quarter of 1970. This makes sense, considering that people have stopped buying
homes. Meanwhile, the growth in consumer credit, including credit cards,
remained at 5.75 percent, the same rate as in 2007.
As consumers try to deleverage
themselves, their spending is down, and saving is up. This is good news for individuals,
but it can potentially have a negative impact on the U.S. economy, which
depends heavily on consumer spending to drive growth.
A big factor in this change is the
relationship of debt to net worth and income. U.S. household net worth is the total value of household assets, including homes, cash, and
equities, less total liabilities, including mortgages, student loans,
and credit card debt.
In the first quarter of 2008, household
net worth fell $1.7 trillion, following a $530 billion decline in the fourth
quarter of 2007. Previously, household net worth had been steadily increasing
for five years.
An analysis by Lord Abbett senior
economist Milton Ezrati revealed that household debt has been
growing for over 50 years.3
...
