10.12.2012
Economic Trends
Changes in Household Borrowing across Metropolitan Areas
Household debt levels rose sharply in the years that preceded the Great Recession. In the 4½ years between 2003:Q2 and 2007:Q4, U.S. household debt levels rose roughly 70 percent. However, in the 4½ years since 2007:Q4, they have fallen almost 8 percent. Household debt accumulation was an important factor in the previous expansion, and the deleveraging, or drawing down of debt, that households are now in the midst of is likely to prove important to both the pace and path of the current expansion.
Much of the increase in debt last decade was driven by mortgage borrowing, which since 2003 has roughly accounted for between 70 and 80 percent of U.S. household liabilities. Because this borrowing was driven by (and also drove) high home-price appreciation in some parts of the country, there is a clear geographic pattern to changes in credit usage over the last decade.
Across 170 metropolitan areas in the continental U.S., or those that had more than 250,000 residents with credit reports in 2011, the average increase in mortgage debt per capita was a substantial 11.2 percent per year from 2003:Q4 to 2007:Q4. Metropolitan areas in the so-called sand states—California, Arizona, Nevada, and Florida—generally saw the largest increases in mortgage debt, with average growth equaling or exceeding 14 percent per year. Areas in the northeast and along the eastern seaboard also experienced above-average growth in per capita mortgage credit. By contrast, throughout the Midwest, including in the Fourth District, increases in mortgage debt were generally below average throughout this period, though still increasing. Outside of Lexington, Kentucky, all of the Fourth District metro areas among these 170 experienced increases in mortgage debt below the 25th percentile.
These patterns are, of course, very consistent with metro-area-level home price changes prior to 2008. As home prices began to decline, however, per capita mortgage debt generally declined along with it. The change was most abrupt in the sand states. From 2007:Q4 to 2011:Q4, these areas, which had previously had the largest increases in mortgage debt, saw the sharpest declines. Some of this change was the product of rising foreclosure rates, where debts were effectively repaid though the forced sales of homes. Undoubtedly, this process was important in many District metro areas as well, which may partly explain why areas here, which were below average in changes in mortgage debt prior to 2007, often continued to be below average on this dimension after 2007. Several metro areas, nevertheless, were above average in both periods, notably along the Atlantic coast outside of Florida, and in some parts of Texas. Overall, mortgage debt for all 170 areas from 2007:Q4 to 2011:Q4 fell by about 1 percent per year.
Automobile-related borrowing is another important category of household credit, although a much smaller fraction of U.S. household liabilities than that represented by mortgage debt. In recent years, automobile-related borrowing has constituted between 6 percent and 9 percent of U.S. household liabilities. Relative to mortgage credit, automobile credit expanded significantly more slowly in the middle of the last decade, growing 31.0 percent between 2003:Q2 and 2007:Q4 versus 82.5 percent. Changes since 2007, however, have been much more similar, with automobile-related liabilities declining 8.0 percent, versus a decline of 10.4 percent for mortgage borrowing.
Though the growth rates differed during the last expansion, in general, metro areas that saw stronger growth in mortgage credit also experienced relatively larger increases in automobile credit. Similarly, after 2007, those areas that saw weaker growth in mortgage credit also experienced relatively weaker growth in automobile credit. In the 4-year period prior to and after 2007:Q4, the correlation between changes in automobile-related and mortgage borrowing at the metro area-level was about 0.4 and 0.5, respectively.
The negative relationship between mortgage credit changes before and after 2007 is also evident with automobile-related borrowing. Many metropolitan areas from the sand states experienced above-average gains in auto credit in the years prior to 2007 and below-average gains thereafter (placing them in the lower-right quadrant of the last chart). Interestingly, several California metro areas were actually below average in both periods. For Fourth District metro areas, the pattern differs from what was seen for mortgage lending. While District metro areas were generally below average in automobile-related borrowing prior to 2007, they have been above average since. This is true for northeastern metro areas as well. However, it’s worth noting that these above-average changes still correspond to declining automobile debt in most cases.
