Americans ran up significant levels of debt between 2001 and 2004, according to a government survey. In this light, Citigroup Global Markets analysts warned investors to avoid subprime unsecured debt, although they did acknowledge that U.S. consumers were able to afford their debt loads.
The Federal Reserve's Triennial Survey of Consumer Finance, released in February, presented data on net worth, income, asset and liability by income groups in the U.S. In terms of American's debt loads, families in the 59.9 income percentile doubled their debt to worth ratios. However, that group also increased their income, by $43,200, or 1.6%. Citigroup said that the ratio of median debt payments to median family income increased by almost 8% nationally, and said the biggest increases came from consumers in the 20 to 59.9 and 80 to 89.9 percentiles. Those groups can afford to take on the extra debt, because they have more financial reserves than income groups below them, said Citigroup, which culled several key points from the survey in its Bond Market Roundup: Strategy. Overall, the amount of debt as a percentage of assets rose significantly, and stands at the highest level, 15%, in 15 years.
Most of this new borrowing was mortgage related, according to the survey, as consumers whittled down their credit card indebtedness by almost 11%. Homeownership increased 1.4% between 2001 and 2004, to almost 70% nationally, and ownership rates for other forms of real estate, including second homes and investment properties increased by 1.2 %. Primary mortgage debt accounted for 75% of total debt, but other mortgage debt made a startling 37% jump. Credit cards accounted for just 3% of the total.
"Such debt carries a lower interest rate and is tax deductible - a rational way to behave," wrote Mary Kane, a Citigroup Global Markets analyst. "Many of these products now also offer significant flexibility to the consumer." Citigroup also noted that nationally, the percentage of debt to income was 18%, which is well within the margin of 25% that lenders generally use in their underwriting standards.
In another sign of rational behavior, Americans' financial assets represented 36% of their total assets. Consumers put about 13% of those assets into transaction accounts, such as checking accounts, as well as CD, savings, bonds and stocks, giving them quick access to so-called cushion funds.
Liquid or not, Citigroup remained wary of the borrowing practices in the lower income groups. Americans in the lowest-to middle-income classes ratcheted up the largest increases in the debt-to-worth ratios, according to the report. While the median debt-to-worth ratio stands at 1.1x overall in the U.S., it was 3.3x for American in the less than twentieth percentile income group.
"As a result of the trends we see in the various income segments, we recommend avoiding unsecured subprime credit, where consumers are more leveraged, have fewer financial resources, and have the potential to be more volatile," Kane wrote.
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