Household Debt Will Exacerbate Recession

While some experts believe that American household balance sheets are looking better than ever, Steven Pressman of The Washington Spectator believes that household debt might be the hidden problem that could cause the economy to spin out of control.

In the second quarter of 2022, United States household debt broke a record, hitting $16.15 trillion. Pressman reports that 75% of the debt is due to mortgages, 10% is college debt, and the remaining 15% is a mix of credit card and motor vehicle debt. Over the past two years, debt has mounted rapidly, partially due to rising interest rates. And while college debt or credit card debt might not be such a problem for those with higher salaries, such as doctors, lawyers, and other professionals, other vocations with lower earning potential are worse off regarding debt repayment.

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Pressman acknowledges the opposing viewpoint that household debt is much more stable than it has been over the past twenty years. Household debt relative to disposable income has held steady at 130% since 2016, Pressman says, and consumer debt payments relative to disposable income are down to 8.4% as of 2021. And since 2020, delinquencies have fallen from 3% to less than 2%, some say due to consumers utilizing disposable income on debt repayment rather than social activities during the worst parts of the COVID-19 pandemic.

However, the breaking point of household debt is around the corner, says Pressman, due to the amount of mortgage debt consumers currently hold. The 2008 recession began when mortgage payments started slipping, and from there, the economy at large took a turn for the worse.

While larger financial institutions were able to rebound, households still suffered under the pressure of exorbitant payments. Household income took nearly a decade to recover from that blow, Pressman adds, meaning that debt played a considerable part in the economic recovery on an individual level.