Americans still want to keep up with the Joneses.
That’s one major takeaway some 18 months into the pandemic, with household debt rising 2.1% in the second quarter to a record $15 trillion, booking its largest quarterly climb in almost eight years, according to the latest report from the Federal Reserve Bank of New York.
Only now, armed with a raft of aid from Washington to offset the COVID crisis, many households also stand on the sturdiest ground in two decades, said Voya’s Dave Goodson, head of securitized credit.
“I think we are in a golden age for consumer credit,” Goodson said in a phone interview. “I have not seen it this strong in my career.”
Goodson manages the Voya Securitized Credit Fund VCFIX,
“When you think about credit risk,” Goodson said, “We care about two components. You’ve got to be willing to repay your debts. But you also have to have the capacity — the capacity part is clear.”
As of Friday, Voya’s consumer credit fund was up roughly 3.5% on the year, while the iShares MBS ETF MBB,
For investors in stocks, the Consumer Discretionary Select Sector SPDR ETF XLY,
What the numbers show
Fears emerged at the onset of the pandemic that the U.S. could face another housing crisis as millions suddenly were tossed out of work as COVID restrictions took hold.
But with trillions of dollars in federal pandemic aid, recent U.S. Census Bureau data showed fewer people in the U.S. living in poverty last year, even though household incomes fell.
Importantly, Fed data also showed less than 3% of outstanding consumer debt in the second quarter was in some stage of delinquency, a 2% drop from pre-pandemic levels.
This comes as America’s prolonged affordability crisis changed little for renters, with temporary eviction moratoriums expiring this summer and rents ratcheting higher across the country. But the worst-case scenario, at least for many homeowners, now appears less likely.
This week, the number of borrowers in COVID-19 forbearance programs fell to 1.6 million for the first time since the pandemic, representing about 3% of American home loans, according to Black Knight.
Even with no end to the pandemic in sight, consumers have kept opening their wallets, despite the cost of living this year climbing at its highest pace in decades. Retail spending in August rose, despite glum consumer attitudes as the coronavirus’ delta variant filled hospitals in several states with the unvaccinated.
Finally, the U.S. personal savings rate dropped from its multi-decade high of 33.8% in April 2020, mainly as households spent down the first two rounds of direct pandemic payments, but the rate of savings to disposal income still was near a decade high of 9.6% as of July, the most recent month reported.
Departure from the past
That’s a starkly different backdrop for households than 13 years ago when sloppy credit standards, unhinged leverage, and skyrocketing home prices unleashed the 2008 global financial crisis.
In its wake, millions in the U.S. ended up losing homes to foreclosure and it took several years for consumer credit to really flow again.
“From where I sat during the 2008 global financial crisis, I think there are some key lessons that were learned,” said Tricia Hazelwood, international head of securitized products at MUFG, a veteran banker in the sector.
“One is, the more time it takes to do the recovery, it is so much worse and taxing on the market than putting stimulus out quickly and ramping up to protect the economy,” she told MarketWatch.
This time, consumer borrowing has quickly revived, and so has the issuance of asset-backed bonds, or securities tied to auto loans, credit cards, student loans and other forms of debt.
Issuance already reached $190 billion this year, a near 50% jump from the same stretch of 2020, but also an 7.5% increase from the same period of 2019, before the pandemic hit, according to BofA Global data.
“From my point of view, the ramifications of not doing it are so much worse than doing it,” Hazelwood said of government crisis stimulus.
