The amount of debt owed by American households has fallen to its lowest level since 2006, which analysts are suggesting will help strengthen the wider economic recovery. Household debts fell in the first quarter of the year by over $110 billion, down to a total of just over $11.2 trillion, with credit card and mortgage balances taking the brunt of the hit.
Mortgage debt fell below the landmark $8 trillion mark, hitting $7.9 trillion and the lowest rate of US mortgage debt for some seven years. Declining rates of foreclosure and ongoing low interest rates have helped households repay their balances, while fewer new applications for credit mean rates have been able to steadily decline.
Default rates on loans were down to just 8.1%, the lowest since midway through 2008. As opportunity returns to the US economy and growth picks up more momentum, households are finding themselves in an improving position for paying down their existing debts.
While personal debt levels have declined dramatically, student loans are one area in which there has been a marked growth. However, with rising student numbers and increasing tuition costs, this is one area analysts are suggesting could take more time to improve.
The news has been considered a positive development for the economy. Lower levels of household debt put families in a stronger financial position for the future, as the country moves back into a growth phase. Analysts are expecting that as households continue to pay down their existing liabilities, ordinary Americans will be better positioned to rebuild their financial lives.
The news comes at a time when the Federal Reserve is preparing to wind back on its stimulus measures, which were designed to keep interest rates low and provide liquidity to the financial sector. Speculation has been rife of an imminent reversal of policy, which chairman Ben Bernanke has been keen to mute.
While the Fed is continuing to buy the majority of US government bonds, this could be set to end according to many analysts’ expectations. This has affected the value of the dollar, causing investors to panic about the future of the US economic recovery in a post-stimulus age.
However, financial commentators have suggested that while there may be hiccups along the way, the global economy was on track for a more resilient recovery. Follow John Ferraro on Twitter to hear his views.
Too much personal debt can weigh down an economy, encouraging consumers to hoard cash and making lenders more resistant to increased activity. As a result, analysts are calling the US developments a positive one, creating more optimal conditions for a new boom.
While the US economic recovery still has far to go to achieve pre-recession expectations, personal debt levels show that the country is going through its much-needed healing process. With Bernanke poised to start the QE clawback, this might be another sign that the US economy is more closely nearing a stage where it can finally shed its baggage from the last decade.
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