USA – Page 33 – Digital Finance Analytics (DFA) Blog

US Employment Stronger

Latest US data shows the unemployment rate declined by 0.3 percentage point to 4.6 percent in November, and nonfarm payroll employment increased by 178,000. Further support for a FED rate rise.

Job growth continued in professional and business services and in health care. Thus far this year, nonfarm job growth has averaged 180,000 per month, compared with an average gain of 229,000 per month in 2015.

Incorporating revisions for September and October, which reduced nonfarm payroll employment by 2,000 on net, monthly job gains have averaged 176,000 over the past 3 months.

Employment in professional and business services increased by 63,000 in November and has expanded by 571,000 over the year. Within the industry, accounting and bookkeeping services added 18,000 jobs over the month. Employment continued to trend up in administrative and support services (+36,000), computer systems design and related services (+5,000), and management and technical consulting services (+4,000).

Health care employment rose by 28,000 in November, with a gain of 22,000 in ambulatory health care services. Health care has added 407,000 jobs over the year.

Employment in construction continued on its recent upward trend in November (+19,000), led by a gain in residential specialty trade contractors (+15,000). Over the past 3 months, construction has added 59,000 jobs, largely in residential construction.

Employment in other major industries–mining, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government–changed little over the month.

Average hourly earnings of all employees on private nonfarm payrolls decreased by 3 cents in November to $25.89, following an 11-cent increase in October. Over the past 12 months, average hourly earnings have risen by 2.5 percent. From October 2015 to October 2016, the Consumer Price Index for All Urban Consumers (CPI-U) increased by 1.6 percent (on a seasonally adjusted basis).

Turning to measures from the survey of households, the unemployment rate declined by 0.3 percentage point to 4.6 percent in November. The number of unemployed people fell by 387,000 over the month to 7.4 million. The decrease was largely among adult men. From August 2015 through October 2016, both the unemployment rate and the number of unemployed people had shown little movement on net.

In November, the number of people searching for work for 27 weeks or more was little changed at 1.9 million. These long-term unemployed accounted for 24.8 percent of the total unemployed.

The labor force participation rate, at 62.7 percent, was about unchanged in November, and the employment-population ratio held at 59.7 percent. Both measures have shown little movement in recent months.

In November, there were 5.7 million people working part time for economic reasons (also referred to as involuntary part-time workers). This measure was little changed over the month but was down by 416,000 from a year earlier.

Among those neither working nor looking for work in November, 1.9 million were considered marginally attached to the labor force, up from 1.7 million a year earlier. Discouraged workers, a subset of the marginally attached who believed that no jobs were available for them, numbered 591,000 in November, essentially unchanged from a year earlier. (Marginally attached to the labor force refers to people who had not looked for work in the 4 weeks prior to the survey but wanted a job, were available for work, and had looked for a job within the last 12 months.)

In summary, the unemployment rate declined to 4.6 percent in November, and nonfarm payroll employment increased by 178,000.

US Mortgage Rates Surge Higher

Mortgage News Daily Says Mortgage rates spiked abruptly today, bringing them to the highest levels in well over 2 years. The average lender is now quoting conventional 30yr fixed rates of 4.25% on top tier scenarios with more than a few already up to 4.375%. You’d have to go back to the summer of 2014 to see a similar mortgage rate landscape.

(NOTE: Freddie Mac’s widely-cited primary mortgage market survey, released today, showed a 0.05% increase week-over-week. That increase is actually fairly close to the true week-over-week increase, but only if you’re using last Wednesday or Friday as your baseline. Freddie’s baseline was Mon/Tue–shorter than normal due to the holiday week. Additionally, Freddie’s survey doesn’t capture today’s rate spike, which was roughly 0.10%. The bottom line is that many borrowers will be seeing rates that are .125-0.25% higher this week versus the beginning of last week. By my calculations, if rates didn’t change at all in the coming week, Freddie’s next survey would likely be 0.08% higher.)

The situation is all the more troubling considering the fact that rates weren’t too far above all-time lows less than a month ago. The pace of losses has only been seen 2 other times in the last 30 years (in 1987 and 1996). For the record, 2013’s taper tantrum resulted in a bigger rate spike than we’re seeing currently, but it took more than twice as long to play out. There were no 4-week periods of time in 2013 that compare to rise in rates seen over the past 4 weeks. For those who recall the vicious rate spike at the end of 2010, the current pace is just a bit faster.

The higher rates go–the more the boundaries of past precedent are stretched, the more likely we are to see a rebound. The catch is that there’s no way to know when that rebound will happen until it’s underway. That makes floating very dangerous, and locking potentially very frustrating (because it’s clearly the safer bet since the election, but increasingly runs the risk of being ill-timed).

The US Money Machine

Moody’s says the recent ascent by Treasury bond yields threatens to offset the positive implications for corporate bond issuance stemming from widespread expectations of a declining default rate for 2017.

Markets now look for a Republican President and a Republican Congress to supply a major fiscal jolt to the economy even if tax cuts and additional infrastructure spending further widen a federal deficit that approximated 3.2% of GDP for the year-ended September 2016. By contrast, the federal deficit was a smaller 2.4% of GDP prior to the Great Recession. Moreover, late 2007’s outstanding federal debt approximated 35% of GDP, which was far lower than its recent 76% share.

The Republican Party’s many fiscal conservatives now sitting in Congress are likely to oppose the adoption of a fiscal stimulus program that adds significantly to federal indebtedness in the context of an economic recovery. They will warn of an even greater debt burden once the inevitable recession triggers a cyclical widening of the federal budget deficit. In addition, unforeseen national emergencies or military conflicts can quickly balloon the national debt.

Thus far, the market has been relatively sanguine regarding credit quality’s ability to shoulder recent and forthcoming increases by borrowing costs. However, the narrowing of corporate bond yield spreads since November 8’s Republican sweep masks a climb by the absolute level of borrowing costs that threatens to curb bond issuance noticeably. Were spreads to widen alongside higher bond yields, a likely sell-off of equities would probably spark a “fight to quality” that drives Treasury bond yields lower.

Already, important segments of the equity market have weakened in response to a possibly excessive climb by benchmark bond yields. For example, the interest-sensitive PHLX index of housing-sector share prices was recently down by -4.1% from November 25’s close.

Thus, in addition to Washington’s fiscal conservatives, the Treasury bond market can limit the scope of debt-financed spending. Once the climb by Treasury bond yields materially suppresses business activity, Washington’s new regime will better appreciate the limits to fiscal stimulus.

After considering the late stage of the economic recovery, the favorable default outlook, above-average interest rate risks, as well as the constraints imposed by an aging population and workforce, the prospects for US$-denominated corporate bond issuance appear modest. Following 2016’s prospective 7% increase to $1.416 trillion, investment-grade bond offerings may dip by -2% in 2017. Moreover, high-yield bond issuance’s likely -5% drop to $337 billion for 2016 may give way to a 3.5% increase in 2017, which would still leave 2017’s tally a deep -19% under 2013’s yearlong cycle high. Though the widely anticipated fiscal jolt may fall short of current expectations, less regulation might deliver an upside surprise.

The Month When Everything Changed

November marked one of the most decisive shifts for global financial markets in recent years, with a bevy of asset classes — from bank stocks, emerging-market bonds to hard commodities — staging sharp price swings in the space of a mere three weeks, says Bloomberg.

Investors reckon the ascent of Donald Trump presages a regime shift for the global economy, marked by trade protectionism, a stronger U.S. inflation outlook, and a higher U.S. fiscal deficit.

The anchors of global asset repricing: a stronger dollar, an increase in U.S. growth expectations, fears of a more protectionist Trump-led administration, and a steeper U.S. yield curve which brought the premium for borrowing at the long-end, relative to short-end obligations, back to positive territory.

Developed-market equities have been in vogue over the past three weeks, with a rotation out of defensive stocks in favor of consumer discretionary shares, industrial commodities, and financials underscoring how a repricing of growth expectations has trumped the prospect of a higher discount rate. Meanwhile, fixed-income has fallen firmly out of favor, stocking fears the 35-year bond bull-run is coming to an abrupt end. That signals a reversal of the perverse investment strategy in the first half of the year to snap up equities for yield, and bonds for capital gain.

November was the worst month ever for the Bloomberg Barclays Aggregate Total Return Index, which staged a 4 percent loss, as yields on U.S. 10-year Treasuries climbed from 1.8 percent to 2.4 percent in swings reminiscent of 2013’s taper tantrum.

“The U.S. election result just over 3 weeks ago sparked a huge divergence across asset classes and also between developed and emerging markets,” Jim Reid, Deutsche Bank AG strategist, wrote in a note to clients on Thursday. “In years to come markets may well look back at the month just passed as one of the most pivotal in recent memory.”

Most asset classes were in a relatively stable trading range in the first 8 months of the year. All that changed in the month after the Trump victory.

With the prospect of regulatory relief from a Trump administration, the S&P 500 Financials Index returned 13.9 percent in November, while copper gained 18.9 percent — its best monthly gain in a decade — driven, in part, by Trump’s campaign pledge to turbocharge infrastructure spending.

By contrast, emerging-market local-currency bonds had their worst month of 2016, with Latin American debt, tracked by IHS Markit, shedding 7 percent. The drop in local currencies erased returns for equity and debt investors in dollar terms. The sharp appreciation of the dollar — and associated liquidity fears for emerging markets next year — has challenged leveraged fixed-income trades that rely on cheap dollar funding, with the cost to borrow dollars in Japan rising.

In sum, November saw credit and rate markets taking a hit, while developed equity markets led the gains. “Analysts have been criticized for suggesting beforehand that a Trump victory would instigate a selloff in assets but the reality is that of the 39 global assets we cover (excluding currencies) only 11 are up in November in dollar terms (12 in local currency) with most being U.S. assets,” Reid wrote.

It wasn’t bad news for all emerging markets, however. Russia’s benchmark Micex index of equities gained 4 percent in dollar terms, underscoring expectations of a thawing of tensions between Washington and Moscow next year.

Taking stock: credit, particularly U.S. high yield, has had a solid year thus far while November losses have crimped year-to-date gains in developed rate markets. Elsewhere, there are a flurry of interesting local stories that dominate asset returns this year, including the ongoing saga of European banks, the gilt market’s struggle to recover from its October maelstrom, and the roller coaster in Brazil’s Ibovespa index.

US Household Debt Hits $12.4 Trillion

From Zero Hedge.

The latest just released Quarterly Report on Household Debt and Credit from the New York Fed showed a small increase in overall debt in the third quarter of 2016, prompted by gains in non-housing debt, and new all time highs in student loans which hit $1.279 trillion, rising $20 billion in the quarter.11.0% of aggregate student loan debt was 90+ days delinquent or in default at the end of 2016 Q3.

Total household debt rose $63 billion in the quarter to $12.35 trillion, driven by a $32 billion increase in auto loans, which also hit a record high of $1.14 trillion. 3.6% of auto loans were 90 or more days delinquent.

Mortgage balances continued to grow at a sluggish pace since the recession while auto loan balances are growing steadily, and hit a new all time high of $1.14 trillion.

What was most troubling, however, is that delinquencies for auto loans increased in the third quarter, and new subprime auto loan delinquencies have not hit the highest level in 6 years.

The rise in auto loans, a topic closely followed here, has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies.

Disaggregating delinquency rates by credit score reveals signs of distress for loans issued to subprime borrowers—those with a credit score under 620.

To address the troubling surge in auto loan delinquencies, the NY Fed Liberty Street Economics blog posted an analysis of the latest developments in the sector. This is what it found.

Subprime Auto Debt Grows Despite Rising Delinquencies

The rise in auto loans has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies. Disaggregating delinquency rates by credit score reveals signs of distress for loans issued to subprime borrowers—those with a credit score under 620. In this post we take a deeper dive into the observed growth in auto loan originations and delinquencies. This analysis and our Quarterly Report are based on the New York Fed’s Consumer Credit Panel, a data set drawn from Equifax credit reports.

Originations of auto loans have continued at a brisk pace over the past few years, with 2016 shaping up to be the strongest of any year in our data, which begin in 1999. The chart below shows total auto loan originations broken out by credit score. The dollar volume of originations has been high for all groups of borrowers this year, with the quarterly levels of originations only just shy of the highs reached in 2005. The overall composition of both originations and outstanding balances has been stable.

As we noted in an earlier blog post, one feature of our data set is that it enables us to infer whether auto loans were made by a bank or credit union, or by an auto finance company. The latter are typically made through a car manufacturer or dealer using Equifax’s lender classification. Although it remains true that banks and credit unions comprise about half of the overall outstanding balance of newly originated loans, the vast majority of subprime loans are originated by auto finance companies. The chart below disaggregates the $1.135 trillion of outstanding auto loans by credit score and lender type, and we see that 75 percent of the outstanding subprime loans were originated by finance companies.Auto

In the chart below, auto loan balances broken out by credit score reveal that balances associated with the most creditworthy borrowers—those with a score above 760 (in gray below)—have steadily increased, even through the Great Recession. Meanwhile, the balances of the subprime borrowers (in light blue below), contracted sharply during the recession and then began growing in 2011, surpassing their pre-recession peak in 2015.

Delinquency Rates

Auto loan delinquency data, reported in our Quarterly Report, show that the overall ninety-plus day delinquency rate for auto loans increased only slightly in 2016 through the end of September to 3.6 percent. But the relatively stable delinquency rate masks diverging performance trends across the two types of lenders. Specifically, a worsening performance among auto loans issued by auto finance companies is masked by improvements in the delinquency rates of auto loans issued by banks and credit unions. The ninety-plus day delinquency rate for auto finance company loans worsened by a full percentage point over the past four quarters, while delinquency rates for bank and credit union auto loans have improved slightly. An even sharper divergence appears in the new flow into delinquency for loans broken out by the borrower’s credit score at origination, shown in the chart below. The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years.

It’s worth noting that the majority of auto loans are still performing well—it’s the subprime loans that heavily influence the delinquency rates. Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to have experienced declining performance in their auto loan portfolios.

Conclusion

The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments. Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households.

Is Financial Risk Socially Determined?

From The St. Louis On The Economy Blog.

The authors of the In the Balance—Senior Economic Adviser William Emmons, Senior Analyst Lowell Ricketts and Intern Tasso Pettigrew, all with the St. Louis Fed’s Center for Household Financial Stability—found that eliminating so-called “bad choices” and “bad luck” reduced the likelihood of serious delinquency. With the exception of Hispanic families, this did not get rid of disparities in delinquency risk relative to the lower-risk reference group.

However, this exercise was based on the idea that the young (or less-educated or nonwhite) families’ financial and personal choices, behavior and exposure to luck could conform to those of the old (or better-educated or white) families. The authors suggested that such an approach may not be realistic.

A Lack of Choice?

“We believe a more realistic starting point for assessing the mediating role of financial and personal choices, behavior and luck in determining delinquency risk is a family’s peer group,” the authors wrote. They looked at how an individual family’s circumstances differ from its peer group, hoping to capture the “gravitational” effects of the peer group.

The odds are similar to those that were not adjusted, as seen in the figures below. (For 95 percent confidence intervals, see “Choosing to Fail or Lack of Choice? The Demographics of Loan Delinquency.”)

In particular, they examined how a randomly chosen family fared against the average of its peer group, such as how much debt a young black or Hispanic family with at most a high school diploma has compared to the family’s peer-group norm.

“We assume that the distinctive financial or personal traits associated with a peer group ultimately derive from the structural, systemic or historical circumstances and experiences unique to that demographic group,” the authors wrote.

When assuming that individual families’ choices extend only to deviations from peer-group averages, the authors estimated that:

A family headed by someone under 40 years old is 5.8 times as likely to become seriously delinquent as a family headed by someone 62 years old or more.

Middle-aged families (those with a family head aged 40 to 61 years old) are 4.2 times as likely to become seriously delinquent as old families.

A family headed by someone with at most a high school diploma is 1.8 times as likely to become seriously delinquent as a family headed by someone with postgraduate education.

A family headed by someone with at most a four-year college degree is 1.4 times as likely to become seriously delinquent as a family headed by someone with postgraduate education.

A black family is 2.0 times as likely to become seriously delinquent as a white family.

A Hispanic family is 1.2 times as likely to become seriously delinquent as a white family.

These demographic groups still appear to have a higher delinquency risk than older, better-educated and white families. This suggests that younger, less-educated and nonwhite families may have little choice in the matter.

“The striking differences in delinquency risk across demographic groups cannot be explained simply by referring to differences in risk preferences,” Emmons, Ricketts and Pettigrew wrote. “Instead, we suggest that deeper sources of vulnerability and exposure to financial distress are at work.”

The authors also concluded: “Families with ‘delinquency-prone’ demographic characteristics—being young, less-educated and nonwhite—did not choose and cannot readily change these characteristics, so we should refrain from adding insult to injury by suggesting that they simply have brought financial problems on themselves by making risky choices.”

Each family was assigned to one of 12 peer groups, which were defined by age (young, middle-aged or old), race or ethnicity (white or black/Hispanic) and education (at most a high school diploma or any college up to a graduate/professional degree).

The Problem Of Home Ownership

The proportion of households in Australia who own a property is falling, more a renting, or living with family or friends. We track those who are “property inactive”, and the trend, over time is consistent, and worrying.

It is harder to buy a property today, thanks to high prices, flat incomes and higher credit underwriting standards. Whilst some will go direct to the investment property sector (buying a cheaper place with the help of tax breaks); many are excluded.

This exclusion is not just an Australian phenomenon. The Federal Reserve Bank of St. Louis just ran an interesting session on “Is Homeownership Still the American Dream?” In the US the homeownership rate has been declining for a decade. Is the American Dream slipping away? They presented this chart:

A range of reasons were discussed to explain the fall. Factors included: the Great Recession and foreclosure crisis; tougher to get a mortgage now (but probably too easy before the crash); older, more diverse American population; stagnation of middle-class incomes; delayed marriage and childbearing; student loans and growing attractiveness of renting for some.

Yet, there is very little association between local housing-market conditions experienced during the recent boom-bust cycle and changes in attitudes toward homeownership. The desire to be a homeowner remains remarkably strong across all age, education, racial and ethnic groups. To remain a viable option for all groups, homeownership must become more affordable and sustainable.

They went on to discuss how to address the gap.

Tax benefits are “demand distortions.” Most economists agree that tax preferences for shelter (especially homeownership) push up prices: Benefits are “capitalized” into price or rent. Tax benefits of $150 bn. annually are skewed toward homeowners in high tax brackets via tax deductibility or exclusion. Tax changes likely in 2017—lower rates and higher standard deduction—will reduce tax benefits for homeownership, perhaps slowing or reducing house prices.

There also are “supply distortions” in housing that push up prices/rents. Land-use regulations/restrictive building codes increase construction costs, making housing less plentiful and less affordable. Local governments could reduce these constraints, and housing of all types and tenures would become cheaper.

Tightening Underwriting Standards. Unsuccessful homeownership experiences stem from shocks (job loss, divorce, sickness) that expose unsustainable financing—i.e., too much debt and too little homeowners’ equity (HOE). Reduce the risk of financial distress and losing a home by encouraging or requiring higher HOE and less debt. This would increase the age of first-time homebuyers and reduce homeownership but also reduce the risk of foreclosures.

You can watch the video here. But I think there are some important insights which are applicable to the local scene here. Not least, you cannot avoid the discussion around tax – both negative gearing and capital gains benefits need to be on the table. Supply side initiatives alone will not solve the problem.

US Mortgage Rates Sharply Higher

Mortgage rates in the US have risen by more than 50 basis points since the election in November.

A 30 year fixed is now 4.19%, compared with 3.59% immediately prior to the poll. The dark line shows the Freddie Mac 30 Year rate, the lighter line MND 30 Year fixed.

Further confirmation of a significant reversal in mortgage rates, thanks to the changed yield curve. Such rises will create pressure on households whose income has been static for years. Because most households are on a long-term fix, however, they will have some protection, but any new loan will be set at the higher, less affordable rate.

Of course in Australia, most households are on a variable rate – so any upward movement in rates will translate to immediate pain.

US Housing Bubble 2.0

From Zero Hedge.

US Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying.

The spike in rates has taken “UNAFFORDABILITY” to such extremes that prices, rates, and/or credit are now radically out of scope. At these interest rate levels house prices are simply not sustainable even in the lower-end price bands, which were far more stable than the middle-to-higher end bands (have been under significant pressure since spring). The Data (note, for simplicity my models assume best-case 20% down and A-grade credit, which is the “minority” of lower-to-middle end buyers).

1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

2) The average $274k builder house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed.

For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper.

Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

3) Bonus Chart … Case-Shiller Coast-to-Coast Bubbles

Bottom line: IT’S NEVER DIFFERENT THIS TIME. Easy/cheap/deep credit & liquidity has found its way to real estate yet again. Bubbles are bubbles are bubbles. And as these core housing markets hit a wall they will take the rest of the nation with them; bubbles and busts don’t happen in “isolation.”

Case-Shiller’s most Bubblicious Regions

Ask Yourself: If 2005-07 was the peak of the largest housing bubble in history with “affordability” never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; high unaffordability; tighter credit; higher unemployment; a weak total workforce; and shrinking (at best) wages?
Logical Answer: Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

The mind-numbing Case-Shiller regional charts below are presented without too much comment. The visual says it all.

To Borrow, or not to Borrow?

From The Federal Bank of St. Louis Blog.

Have you ever wondered whether it makes sense to borrow for college? Or how much debt is worth taking on to get that dream home?

Well, we at the Center for Household Financial Stability did. Accordingly, we organized, along with the Private Debt Project, a research symposium back in June to see if there exist tipping points at which taking on more debt could be too financially risky. After all, if debt doesn’t lead to more income and wealth, what’s the point? Asking these questions is one of the driving forces at the Center because we don’t think enough attention is being paid to the debt side of family balance sheets.

For the symposium, we commissioned several new papers from Fed and non-Fed economists. The papers—along with my summary and reflection—were released last week.

The research findings were both interesting and often counterintuitive. Let me mention just a few.

My colleagues Bill Emmons and Lowell Ricketts looked at loan delinquencies. Reflecting our Center’s ongoing work on the demographics of wealth, they found that younger, less-educated and nonwhite families were more likely to tip into delinquency. No huge surprise there. But then the co-authors posed what I think is a groundbreaking framing question, including for many Fed economists: Are these struggling families at this greater risk because they make riskier financial choices or because of structural, systemic forces that are largely shaping their financial behavior? In other words, is our tipping points question whether more financial education is primarily needed or whether a change in public policy is primarily needed?

Neil Bhutta and Benjamin Keys also discerned some alarming tipping points by looking at the nearly $1 trillion in home equity extractions between the boom years of 2002-2005. Extractors, they found, were more likely to default on their mortgages, even after controlling for credit scores and other risk factors. Even more surprising, extractors were more than twice as likely to become severely delinquent on their mortgage debts and almost 40 percent more likely to become delinquent on other kinds of debt.

We didn’t just look at the numbers but also the psychology of tipping points. Christopher Foote, Lara Loewenstein and Paul Willen found that, leading up to the financial crisis, excessive mortgage borrowing was fueled not by a financial indicator (the amount of income needed for a mortgage) but by a psychological one (the expected increase in future housing prices).

The symposium also opened up new ways to think about tipping points: At what point, for example, is an aspiration given up because of too much debt? And do different generations—say Gen Xers and millennials—think differently about how much debt is good or bad?

Several trends suggest families will be struggling with high debt levels for years to come, and it behooves all of us to think more about when debt goes from being productive to destructive. The financial health of families and our economy may depend on it.

I hope you’ll have a chance to read all of the papers, each one novel and forward-looking.

Additional Resources

Symposium: Tipping Points: Mapping and Understanding the Impact of Debt on Household Financial Well Being and Economic Growth

On the Economy: Mortgage Debt’s Share of Total Debt Keeps Declining

On the Economy: How Consumer Debt Has Evolved in the Nation and the Eighth District