08 November 2010

Consumer Debt Down

Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts. . . . [There has been] a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.

Excluding the effects of defaults and charge-offs . . . non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. “Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs[.]" . . . [A]re consumers becoming more frugal? Yes. Holding aside defaults, they are indeed reducing their debts at a pace not seen over the last ten years. A remaining issue is whether this frugality is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior.

From here.

Total consumer debt went from $4.6 trillion in 1999 to a peak of $12.5 trillion at the start of 2008 to $11.6 trillion two years later.

The mix of debt types has changed materially ion the last decade as well.

Student loans, mortgage loans, and home equity loans are a larger share of the total. Car loans have declined about 25% as a proportion of the total. Credit cards and "other" loans as significantly smaller as a share of the total. In all real estate backed debt has gone from about 70% of the total to 80% of the total; car loans from 8% to 6%; credit cards from 10% to 6%; student loans from about 1% to 5%; and "other" from 9% to 3%. I suspect that "other" involves mostly
unsecured personal loans and fixed term loans for major purchases other than cars.

Unsecured lending that is dischargeable in bankruptcy now makes up just 9% of all consumer debt. In 1999, it made up 19% of all consumer debt. Put another way, almost all of the growth in consumer debt in the last decade has come from secured lending (primarily on homes) and student loans, both of which receive preferential treatment in bankruptcy.

The shift also points to wealth effects from the housing bubble and a shift towards financing higher education with debt as the overwhelming drivers of increased consumer debt levels in the first decade of this century. If that hypothesis is right, places where there has been less of a housing bubble will have seen much less growth in consumer debt than places that had one.

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