Record Levels of Household Debt: 'Not to Worry'

The commercial real estate industry needn’t be frightened by the headlines about how household debt and revolving credit card debt are at all-time highs.

On an inflation-adjusted basis, total household debt is on par with where it was in 2008, John Chang, National Director of Research and Advisory Services, Marcus & Millichap, said in a recent business video by his firm.

“Even though we’re at a record in terms of nominal dollars, on an inflation-adjusted basis, we have been here before,” Chang said.

“The bad news is that the last time we hit this level of debt was just before the global financial crisis. Income levels, however, are different this time.”

While inflation-adjusted total consumer debt is about the same as it was in 2008, the economy is much bigger.

The U.S. GDP is now 29% larger than it was before the global financial crisis – a difference of about $6 trillion.

“To put that number in perspective, since the pre-global financial crisis peak, the U.S. economy has added the entire economy of Great Britain and the entire economy of France, combined,” he said. “And there are a lot more people working in the US.”

Total employment is at an all-time high. There are almost 18 million more jobs today than there were prior to the global financial crisis and that means people are making more money.

Real personal income is 32% higher than it was before the financial crisis, a gain of more than $5.5 trillion.

Likewise, inflation-adjusted median household incomes are up and so is the real disposable income per capita.

“So, if you look at consumer loans as a percentage of GDP, it’s down considerably,” Chang said.

“The same holds true when you look at inflation-adjusted household debt as a percentage of GDP.

“And when you look at household debt payments as a percentage of disposable income, they’re down dramatically compared to before the financial crisis.”

Chang said that even though, as the media keeps telling us, consumer debt is at a record level when you consider how much income is sitting on the other side, the numbers aren’t as scary.

This is a big part of why we continue to see growth in retail sales and consumption as well as the economy as a whole.

From a commercial real estate perspective, this is all good news, Chang said.

“It implies that despite higher levels of nominal debt, people and businesses do have the financial wherewithal to support demand for retail space, hotel rooms, self-storage space, apartments, and industrial space if they want to,” he said.

This is shown lately in the rising major confidence indexes.

“They give us insight into people’s willingness to spend, consume, form new households, and lease space,” Chang said.

If you rewind the clock to this time last year, the rhetoric was focused on surging inflation, higher gas prices, higher living costs, and rapidly rising interest rates, which scared people and confidence dropped, Chang said.

“But it appears the dialogue has shifted and that could unlock space demand for almost every type of commercial real estate,” he said.

“The combination of downward trending inflation and improving likelihood the Fed will keep rates flat, reduced recession risk and the resulting rise in confidence levels are bolstering the commercial real estate investment outlook.

“The caveat, of course, would be a new setback like a severe hurricane season or if the banking sector takes another hit.

Barring that, Chang said commercial real estate demand is positioned to strengthen going forward.