Household Debt Hits Record High, Is A Big Rise In Consumer Bankruptcies Far Behind?

It is the season of spending, which might not be a good thing for most American households or lenders. Last quarter, total household debt carried by Americans has reached another record high--$13.5 trillion, according to the Federal Reserve Bank of New York.

Driven by $9.1 trillion in mortgages, total household debt in America is now $837 billion higher than its previous peak in 2008--just as the Great Recession was beginning. Household debt has been steadily rising once again for more than four years, but the $219 billion rise in total debt (for the quarter ended September 30^th) was the biggest jump in household debt since 2016.

The concern, of course, is that the rise in household / consumer debt may foreshadow an increase in loan defaults and make it harder for families to recover when recession strikes again—and recession will come again. Americans now owe almost 5% more than they did at the onset of the Great Recession, due largely to student loan debt that’s increased by a staggering 144% in 10 years, and which debt is largely non-dischargeable in bankruptcy. While the immediate cause of the Great Recession was the subprime mortgage collapse, American households also took on record levels of debt prior to the downturn--in mortgages, credit card balances, auto financing, and student loans.

There are multiple, similar causes for concern now that closely mirror the financial situation of most American’s leading up to the Great Recession. In 2017, household debt surpassed 2008 levels. Additionally, household debt has been rising for 16 straight quarters. Mortgages represent the majority of these liabilities ($9.1 trillion), but student loans and auto loans have both reached new highs. As I wrote about earlier this year, student loans are experiencing surging delinquencies. Finally, for the first time since the Great Recession, more consumers with below-average FICO credit scores are again gaining access to credit cards.

Soaring household debt is a threat to banks, lending institutions, and the overall financial market. If history is any guide, the confluence of a cooling economy and rising household debt levels could mean a significant increase in consumer bankruptcies in 2019.