Economic Indicators Remain Positive Despite Record Household Debt
M&M's John Chang explains why mounting debt will not hurt the economy
As the US waits for what is expected to be a soft landing for the economy, questions remain about the financial resilience of US consumers. Elevated debt could restrain consumer spending, an important driver of economic growth.
“If people get too far out over their skis by borrowing too much money, the economy could hit a wall,” said Marcus & Millichap national director of research and advisory services John Chang.
As of the second quarter of this year, total household debt was at a record high of $17.8 trillion. Nearly three-quarters of that debt, $12.9 trillion, is housing debt including mortgages and home equity lines of credit, which are at very low interest rates. Most people have a fair amount of equity in their homes, which means housing debt is unlikely to be a problem, said Chang.
The remaining $4.9 trillion of nonhousing debt encompasses $1.6 trillion of auto loans and $1.6 trillion of student loans as well as $1.3 trillion in credit card debt.
“That sounds like dire news, but there are two sides of this story,” said Chang. “First, we have to consider that the total number of jobs in the United States is at an all-time high as of September. There were more than 159 million jobs in the US. That’s 2.4 million more jobs than there were a year ago, and 7.7 million more jobs than there were five years ago in 2019 before the pandemic.”
Second, wages have been growing more quickly than inflation, Chang said. The three-month average, median hourly wage growth as of September was 4.7% while the headline CPI inflation number for the same month was 2.4%.
Household debt service payments as a percentage of disposable income is about 11.5%, which is higher than it has been since the pandemic. However, it is on par with debt service payments from 2014 to 2019. Chang said for some households, the mounting pile of debt is a real problem, especially lower-income households that face disproportionate debt and economic headwinds.
However, credit delinquency rates are well below where they were even during the Great Financial Crisis, he said. “While some households face substantial economic pressure, most people are in a relatively strong financial position, and as a result, consumption will likely remain healthy,” said Chang. “That’s good news for commercial real estate.”
Sustained consumption will not only support the economy as a whole, but it will bolster retail space demand, noted Chang. That will lead to demand for industrial space, and the strength of the employment market and wage growth will continue to invigorate household formation, growing demand for both rental housing and self-storage space.
“In addition, strong household balance sheets tend to support leisure travel, strengthening demand for hotel rooms,” said Chang. “So while we continue to hear about economic risks like rising debt levels and delinquency rates, many of the most important indicators remain positive.”