Content area
Full Text
Household credit conditions are at an inflection point. After years of booming loan growth and improving credit quality, growth is set to slow and quality to erode. Residential mortgage lenders and those that eater to lower-income households face the most significant challenges.
Credit growth has been robust. Household liabilities are expanding at an astounding over12% year-over-year pace. Only one other time since World War II, in the mid-1980s, was lending stronger. Not only has household loan growth accelerated throughout this decade, it did not even falter during the 2001 downturn. Booming mortgage lending has fueled this growth at the expense of credit card lending, which has experienced very little growth in recent years.1
Current household credit conditions arguably couldn't be better. As of June 2006, only 20% of household liabilities were considered to be subprime or had recently suffered a significant credit problem.2 This figure is down from over 25% of liabilities during the 2001 recession. The declining subprime share is evident across all types of loans. The mortgage subprime share, for example, has fallen from over 15% to less than 10%, while the subprime share of credit card loans has declined from 40% to less than 30%.
The balance sheets of high-income households appear uniformly solid. According to the Federal Reserve's 2004 Survey of Consumer Finances, the real median net worth of families in the top decile of the income distribution was well over $900,000 (see Figure 1).3 These families have seen their net worth more than double in just the past decade. The net worth of those in the next three top deciles of the income distribution is not as substantial, but they, too, have experienced a near doubling in wealth since the mid-1990s.
Stock and home ownership among these families is near 80%, and a majority have some form of measurable retirement savings. Across all families, home ownership is less than 70%, stock ownership is less than half, and only 33% have retirement accounts.
Consistent with their ample net worth, very few of these high-income families have onerous debt loads. Of those families in the top two quintiles of the income distribution in 2004, less than 5% were devoting more than 40% of their after-tax income to servicing their debts. If...