Perryman: Household debt is high but (so far) manageable

Household debt in the United States is at an all-time high – more than $17 trillion. Of that amount, the lion’s share, almost $12.4 trillion, is for housing, and credit card obligations recently topped $1 trillion. These are big numbers, and they are rising.

The question is whether they are a cause for concern. The short answer is “not really” given current conditions, though there are some underlying issues which bear watching.

The Federal Reserve Bank of New York tracks household debt using a nationally representative random sample of Equifax credit report data; it is reported quarterly in the Household Debt and Credit Report. Total household debt balances grew by $16 billion in the second quarter of 2023, a relatively small increase. The largest increase was in credit card debt, up $45 billion to $1.03 trillion. After dropping sharply during the first year of the pandemic due to stimulus payments and a lack of options for spending, credit card balances have recently been expanding at a notable pace.

In Texas, total debt per capita is $55,400, slightly lower than the national average of $59,970 and well under states such as California ($83,330) or Nevada ($66,920). A key reason is mortgages, which are $66,900 per capita in California but only $36,240 in Texas. Compared to the U.S. average, Texans tend to have significantly higher auto loan debt and slightly larger credit card balances.

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Although there has been a slight uptick in accounts with overdue payments, delinquency rates are generally around pre-pandemic levels. It’s a very different situation from the Great Recession, during which financial difficulties and debt delinquencies rose rapidly and affected individuals and households across the income spectrum. In fact, the current pattern is more of a return to normal than a signal of a major problem.

These overall increases are largely continuations of long-term trends given recovery from the pandemic-related shifts. A couple of components, however, are somewhat troubling.

One is auto loans. Delinquencies are rising and an increasing percentage of owners have negative equity due to purchases at high prices during recent supply chain disruptions. While it’s possible to trade a car with negative equity, rolling the amount into the new loan increases the financial burden.

Mortgages are another potential challenge. Homeowners who locked in extremely low interest rates may be unable to afford comparable homes or upgrades at current rates and are under pressure to remain where they are. As a result, there aren’t many houses for sale, and the real estate market will take time to fully normalize.

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Thus far, households appear to be managing their debt levels relatively well despite the challenges. Barring an unforeseen shock to the economy, this pattern will likely continue. Stay safe!

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 3,000 clients over the past four decades.