It is a well-known fact that the U.S. economy relies heavily on consumer spending and consumption. However, if this spending and consumption are at risk in any way – for example, due to excessive borrowing by consumers – it could pose a problem.
This issue has recently come to light with the release of the Federal Reserve of New York’s Q2 2024 Household Debt and Credit Report, which revealed that household debt has reached $17.8 trillion. This number has generated numerous headlines about its increase.
John Chang, Senior Vice President and National Director of Research & Advisory Services at Marcus & Millichap, acknowledged this high level of debt in his video “Will Elevated Debt Threaten the Economy?” He broke down where this debt comes from:
– $12.9 trillion consists of mortgages and home equity lines
of credit.
– $1.6 trillion consists of student loans.
– $1.6 trillion consists of auto loans.
– $1 .3trillionconsists o fcredit carddebt ,whichisat arecordhigh.
While these numbers may seem alarming at first glance, there are two sides to consider here.
Firstly, job growth continues to be strong with 7 .7 million more jobs than before the pandemic hit in 2019.Secondly,wagegainsareoutpacinginflationrates.Thismeans that people have more money available for spending despite their high levels o fdebt .
Some may argue that household debt service payments as a percentage o fdisposableincomearecurrentlyattheirhighestlevelsincebeforethepandemic.However,this can be attributed partlytotheunusualcircumstancesbroughtonbythelockdownsands timuluschecks received by consumers during this time period.Chang believes it would be more accurate to look back at pre-pandemic times between 2014-2019 when average household debt service payments were only slightly higher at 11.7% of disposable income.
This is not to say that consumer debt should be disregarded as a potential issue. Chang acknowledges that lower-income households may face more challenges due to their disproportionate levels of debt, which can lead to elevated delinquency rates for credit card and auto loans.However, even in these cases,the delinquency rates are still below those seen during the global financial crisis (GFC). Overall, most people have strong financial positions and will continue to drive consumption in the economy.
In terms of its impact on commercial real estate (CRE), Chang believes there could be some positive effects:
– Retail space demand could improve with increased consumption.
– Industrial demand may also see a boost as a byproduct o fincreased retail activity.
– Job and wage growth should support rental housing and self-storage space demand.
– Strong household balance sheets can contribute towards leisure travel, potentially improving hospitality numbers.
In conclusion,it seems that while there may be concerns about high levels o fconsumerdebt,in general,the majorityofhouseholdshavestrongfinancialpositionsandwillcontinue toparticipateintheeconomy’sconsumption-drivengrowth.Thisshouldhaveapositiveimpacton CRE sectors such as retail,hospitality,and industrial spaces.
