What the Fed Report on U.S. Household Debt Means for Housing

In February, the Federal Reserve Bank of New York released its Quarterly Report on Household Debt and Credit for Q4 2019. The report provides trends in the volume and creditworthiness of the various categories of household debt, including home mortgages, credit cards, auto loans and student loans.

At the end of 2019, the aggregate debt of all U.S. households was $14.15 trillion, a record high. The previous peak was reached in Q3 2008 at $12.68 trillion. After the Great Recession, households ultimately reduced their debt burden to $11.15 trillion in Q2 2013. In other words, since then, household debt has increased by $3 trillion, or 27%. That is not necessarily a bad thing, given the steady growth of the economy and household wealth, as well as the low interest rate environment, during the same period.

From a real estate perspective, our focus is on home mortgages, which grew to $9.56 trillion at the end of 2019, excluding home equity loans. Not surprisingly, home mortgages are the lion’s share of household debt, and the peaks and troughs follow the pattern noted above. The current outstanding debt is just above the peak amount in 2008 of $9.29 trillion. Interestingly, the volume of outstanding home equity loans has been declining steadily since 2008 from just over $700 billion to around $390 billion today.

Despite the growth in home mortgages, their performance has improved each year since the recession, with the year-end 90+ day delinquency rate at just 1.07%, compared to the peak of almost 9% during 2010. Average credit scores at origination were 770 in Q4, near the high when lenders were being extra conservative as we emerged from the recession.

The other type of loan particularly interesting to real estate professionals is student debt. While this may seem surprising, the enormous increase in student debt over the past 20 years impacts the credit capacity of college graduates and, therefore, could influence their preferences in buying or renting a home. In the early 2000s, the volume of student loans was under $250 billion. That balance has continued to grow, even during the Great Recession, and is now a staggering $1.5 trillion, the second largest category of household debt. That debt is a burden to many. The 90+ day delinquency rate has averaged more than 10% since the beginning of the Great Recession and was 11.06% at the end of 2019.

As a consequence of this debt burden, many in the real estate sector, including myself, have publicly expressed concern over the ability of younger adults to quality for mortgages and purchase homes. However, when reviewing the Fed data on new home mortgage originations by age, it appears that while the percentage of younger adult to total originations varies each quarter, over time the average has not decreased, while student debt has increased. The 18-29 age group comprises an average 8% of total originations, whether you look at the last five, 10, or 20 years of data provided. The 30-39 age group comprises an average of about 27% of total originations during those time periods. Therefore, it is possible that we overestimated the negative impact of student debt on the housing market, which may actually have been mitigated by a decade of very strong and steady job growth along with more recent gains in wage inflation.