Americans take on more debt

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The great American debt reduction could be over, thanks in part to a perked-up housing market.

Outstanding consumer debt grew by less than a half-percent, to $11.34 trillion, in the final quarter of 2012 from the previous quarter, marking the first increase in household debt in more than four years, according to figures released Thursday by the New York Federal Reserve Bank.

The increase coincided with an improving housing market. New-home starts, home prices and home sales all have been rising recently.

“While it is too soon to conclude that a trend has been established in which households are beginning to increase their debts again,” says James J. McAndrews, executive vice president of the New York Fed, “there are signs that the four-year long contraction is slowing.”

Outstanding mortgage debt remained roughly flat in the fourth quarter, while student loans, auto loans and credit cards together increased by 1.4 percent to $2.75 trillion. Auto loan debt led the increase, rising by $15 billion. Student loan debt increased $10 billion during the period and credit card balances rose $5 billion.

In general, an increase in debt, along with low delinquencies, signals more confident consumers — an essential ingredient for a growing economy, says Bernard Baumohl, chief global economist at The Economic Outlook Group. He notes that the fourth-quarter increase in balances was tiny, representing consumer constraint in the face of uncertainty surrounding the “fiscal cliff.” But Baumohl expects borrowing to accelerate this year.

“Delinquencies and debt have plunged in the last few years,” he says. “That tells you that households are in better position to take on more borrowing.”

Still, clouds remain. Student debt delinquencies continue to worsen even as delinquency rates in other loan types improve. One in 6 student debt borrowers are at least 90 days behind on their payments. And more than 2 out of 5 borrowers either saw their balance increase or stay the same, according to Donghoon Lee, a senior economist at the New York Fed.

There was also a strong correlation between delinquent student loan borrowers and delinquent borrowers of other types of debt, Lee says. He stopped short of indicating which one causes the other.

The effect of rising student debt and delinquencies on economic growth is unclear. Those who are delinquent will have problems qualifying for other types of credit, hampering their ability to spend, says Wilbert van der Klaauw, senior vice president and economist at the New York Fed.

But college graduates historically have lower unemployment rates, fare better during recessions and make double of their high school graduate counterparts, says Andrew Haughwout, a vice president and economist at the New York Fed.

“While there is a debt burden, the increase in human capital should contribute to economic growth,” Haughwout says. “How these play out remains to be seen.”

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