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Younger Americans: No House, No Car, Less Debt

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The bust that followed the epic borrowing binge of the late-2000s has apparently had a sobering effect on younger borrowers.

Americans under 35 are carrying substantially less debt than they were before the 2008 meltdown, according to an analysis released Thursday by The Pew Research Center. Still, they've also put off the big ticket purchases like cars and houses that are typically the main reasons for taking on debt.

There are several reasons younger households are carrying less debt than the generations that preceded them, said Richard Fry, a Pew senior economist.

"We know they're going to school more, so that puts them into the job market later, and they're postponing marriage and having kids later," he said. "So if you marrying and having kids later, the urgency to buy a home and get a mortgage is also delayed as well."

When they decide to begin their borrowing life in earnest, younger households are also having a harder time getting bankers to go along with their plans. Gone are the days when lenders carpet-bombed mailboxes with credit card offers or set up tables on college campuses to hand out cards with generous limits to freshmen with no steady income to pay them off.

While lending has loosened up a bit since the 2008 credit crash, bankers are saying yes only to the most creditworthy applicants. Younger borrowers -- who typically have a much shorter financial track record than older borrowers -- are having a tougher time getting approved

"There's some easing of credit, but we're not talking a fire hydrant being turned wide open," said Keith Leggett, a senior economist at the American Bankers Association. "Mortgage lending, for example, is still tight and will probably remain that way with the rules that are coming out of Washington."

The devastating impact of the credit bust and the resulting surge in home foreclosures also left many younger borrowers more than a little gun-shy.

Until 2006, generations of young adult Americans had no reason to doubt the conventional wisdom that buying a house was a sure-fire investment.

However, the allure of home ownership was badly tarnished by the housing collapse. Since the bust, home ownership has become a financial albatross for millions of Americans who now owe their lender more than their house is worth. That collective "negative equity" now stands at about $1 trillion, according to figures released Thursday by Zillow.

The housing bust also knocked many younger households, who bought their first homes shortly before prices peaked in 2006, back into the rental market at greater rates than in the past, said Fry.

Younger Americans are also putting off borrowing to make other big-ticket purchases, including cars. In 2007, when credit was easy to get, nearly three out of four under-25 households had a car, the Pew researchers reported.

By 2011, that number had dropped to two-thirds. Despite a recent surge in car buying, and a pickup in auto lending to subprime borrowers, both the number of younger households and their average loan balances have fallen since 2007.

The one exception to younger Americans' aversion to borrowing is student debt, which now stands at roughly $1 trillion outstanding. While more younger Americans are going to college and graduate school, financial aid has not kept up with rapidly rising tuitions. As a result, some 40 percent of younger households were carrying student debt in 2010, up from 34 percent in 2007.

Older households have also lightened their debt burden since the 2008 credit crunch. From a peak of $12.7 trillion in the third quarter of 2008, total household debt has fallen by about 11 percent, according to the New York Federal Reserve. The bulk of that decline has come from a 14 percent drop in mortgage debt outstanding, much of which was wiped out in foreclosure.

The exception has been among the oldest Americans, who have seen their debt burden increase sharply since the 2007 recession began, according to an analysis from the Employee Benefit Research Institute.

For households aged 75 or older, the average debt burden essentially doubled to more than $27,000 in 2010. Debt payments, most of which went to paying off a mortgage, consumed 7.1 percent of income in 2010 – up from just 4.5 percent in 2007.

Homeowners of all ages are getting some help from record low interest rates, which have allowed many to lighten their monthly payments. On Thursday, the Mortgage Bankers Association reported that the percent of borrowers who have missed at least one payment has fallen to the lowest level since the credit crunch high in the fourth quarter of 2008.

Yet the overall financial health of younger households — most of whose wealth is tied up in their homes—has not recovered as well as older households, which tend to have more wealth in financial assets, according to Fry.

While the stock market has recently rebounded to pre-crash levels, housing prices, which fell by roughly one third from peak prices, have retraced only a fraction of those losses.

The economic impact of the lower debt burdens carried by younger households will likely have a mixed impact on the economy. The smaller pool of first-time buyers is likely one of the main reasons the housing market's post-recession recovery has been weaker that most in the past half century.

On the other hand, households with lower debt payments typically have more cash to devote to consumers spending, which makes up 70 percent of U.S. economic activity.

Either way, if the credit collapse of 2008 left younger borrowers with a lasting aversion to debt, that's not good news for lenders, who have traditionally sought to build relationships with customers early in their adult life.

"That the big question that bankers are wrestling with: where are these new loans going to come from?" said Leggett. "That is the question I get from bankers all the time."

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