Debt was major factor in the collapse of the housing market and the resulting financial crisis. People paid too much for houses and, more importantly, borrowed too much money – in some cases more than 100% of the purchase price.
In other cases, people who had owned their homes for years and had manageable mortgages kept borrowing against their equity as home values skyrocketed. When the bubble popped they owed all that money but had no way to pay it back. It is classic example of toxic debt.
Deleveraging – getting rid of debt – was the primary focus for both corporations and consumers in the years immediately following the Great Recession. How much progress have we made? The Pew Charitable Trusts conducted a study to find out, concluding that 80% of consumers still hold some debt.
But some debt is not necessarily a bad thing. The Pew study attempted to dig deeper, to see how consumers in general, and among specific groups, are managing that debt.
The study raises some significant concerns. It found that while some households have paid down debt, others have increased their debt load since the end of the recession.
Of the 80% who have debt, a home mortgage is the most common form. A mortgage is one of the most benign forms of debt because there is always a cost associated with maintaining a residence. If you were not paying a mortgage you would be paying rent.
In many markets, rent can cost just as much, or even more, than a monthly mortgage payment. As long as the payment is affordable, mortgage debt can provide stability – since it doesn't go up every year – and helps a home owner build some equity over time.
Bad timing for GenX
The study found that Gen Xers have higher mortgage debt than other generations at similar ages, in part because of when they purchased their homes. During the run-up in housing prices before the Great Recession, Gen Xers were in their prime homebuying years.
The typical Gen Xer is in his or her mid-30s, and has more than twice the mortgage debt that Baby Boomers had at the same age. But older consumers have a troubling amount of debt themselves.
“Eight in 10 Baby Boomers hold some form of debt, and nearly half are still paying on their homes,” the authors write. “Boomers who are still paying mortgages typically owe $90,000 on their homes.”
Among the oldest Americans, those in the generation born between 1928 and 1945, 90% report being retired and, presumably, on fixed incomes. But more than half – 56 percent – of these retirees have debt.
“Because most older Americans are not eliminating debt before retirement, they may be at greater risk of financial insecurity in their golden years,” the authors conclude.
The report expresses concern for the younger generations, but says at this point the effect of debt on Millennials and GenX can't be determined. However, it does end on a hopeful note when it suggests that the right kind of debt, well-managed, can lead to greater wealth-building in the future.