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How Did U.S. Consumer Debt Rise 6%?

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What’s behind the increase in consumer debt?

According to a recent report by the Experian credit bureau, there were signs that Americans are beginning to take on more consumer debt, reversing a five-year trend that began with the financial crisis.

For 2013, the credit bureau reported a 46% increase in home equity lending, a 19% increase in credit card originations, a 19% increase in auto loans and a 5% increase in new mortgage loans.

What conclusions might be drawn from this data? It is best reviewed in context with other data that the New York Federal Reserve Bank provides.

Homeowners spending again

The massive increase in home equity lending may reflect several things. For homeowners, it suggests that their home values have increased to the point where enough equity exists to allow them to draw on it. The increase in earnings at chains like Home Depot and Lowe’s suggest these lines are being made for home improvements. It is also a reversal of a multi-year decline in HELOC balances, brought on by the reverse effect of home prices cratering from the housing crisis.

Credit card originations rise

New credit card originations have actually been on the rise after a dramatic decline from 2007 to 2010, when the number of accounts opened within 12 months fell from about 240 million to 140 million. That number is now back up over 200 million. Two-thirds of originations went to prime and better consumers. This is particularly interesting. This explosion in originations comes after a multi-year decline in 90+ days delinquencies, which had been at 14.5% of accounts and had dropped to 9.5%. This was the inverse of the number of accounts closed within 12 months. Those spiked in the financial crisis, then dropped back to normal, and are falling again.

Banks boost marketing

It suggests that banks have weeded out the worst consumer risks and collected or sold off that debt, and are being more aggressive in marketing to consumers again. That a full third of new originations went to non-prime consumers suggests that banks are comfortable with this tranche of consumers again, and willing to take risks on them. It may also help explain the flat-to-down same-store sales seen at nonprime lenders like payday and installment stores over the past few quarters.

Car sales keep rolling

The auto loan increase is not surprising at all. Both the new and used auto industry have done extremely well even in this weak recovery. As an ad executive friend told me, auto advertising is always the first to recover. Thus, as car sales increase, it stands to reason that auto loans would also increase.

Mixed messages on mortgages

The mortgage data can be deceiving. The number of new foreclosures and bankruptcies continue to see fresh lows since the financial crisis. New home sales, existing home sales, earnings from homebuilders – the data from these categories is all over the place. A lot of distressed homes are being purchases by speculators, so that may account for some of the mortgage increases. Other portions of it may be genuine homebuyers getting a mortgage as home prices in their geographical region have stabilized. Much of what is occurring in the home pricing space is highly geographically dependent. The deals in California and Nevada are not as attractive as in Atlanta, for example.

Bottom line: Overall, it appears that Americans are taking on new debt for the first time in years. If the post-crash argument that we borrowed our way to prosperity holds true, we seem to be doing it again.

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