On a wave of anti-COVID government payments, recovery demand and a negative real rate (inflation is an order of magnitude higher than the Fed’s base rate), the growth rate of American consumer debt in the fourth quarter of 2021 was the highest since the global financial crisis.
Consumption within the United States is the final link in the international supply chain, the goal that the whole world is working towards. Together with Payday Depot, we understand how and for what Americans take loans.
The types of loans that are the most common
Roughly speaking, consumer debt is everything that is borrowed and spent on personal consumption. This include:
· mortgages;
· credit card debt;
· higher education loan;
· auto loans.
Consumer debt does not have the best reputation: it is by no means the optimal form of financing at high rates, which can be avoided. From a financial point of view, consumer goodies acquired in this way do not rise in price over time and usually do not bring the expected benefits.
Why is consumer lending quite blooming?
In addition to the disadvantages, consumer lending has a weighty plus: it smoothes consumption, stimulating an increase in production that is, pushing the growth of the economy. A person is arranged in such a way that at the beginning of his life it is more profitable for him to invest radically in education and housing, and then, when career growth increases the level of income, pays off the debt year after year.
True, in America this mechanism has gone wrong: the boomer generation, which was lucky with the economic situation, is considered to be better off, and the millennial generation is considered poor and burdened with debts.
Americans’ consumer debt can be divided into residential and non-residential. It is logical because a mortgage loan is the most expensive loan venture aimed at personal consumption.
Residential property prices have been under upward pressure since the start of the COVID-19 pandemic. To self-isolate and sit out pandemic times, whatever one may say, you need your own corner. Then the state decided to support the population with payments. There was a wave of relocation – moving from densely populated and unsafe cities to the outback. In general, there were reasons for rising prices.
In 2021, the driving force behind this growth was the increase in prices for raw and building materials. Another key factor was mortgage rates, which fell to record lows in 2020. Unlimited demand for borrowing spurred demand for real estate prices.
American economists believe that the level of housing debt is not a cause for concern: the quality of borrowers is much higher than in 2003-2007 when the financial crisis triggered the collapse of the residential real estate market.
Economists also note a decline in the household debt service ratio, which reflects the percentage of disposable income that goes into mortgages. The 30-year average fixed mortgage rate has steadily declined in the 20th century. In short, there is no need to worry about current mortgage debt.
