20140204-NATIXIS-United_States_the_end_of_household_deleveraging_a_positive_factor_for_US_growth_11页_644kb

Summary of FLASH ECONOMICS: US Household Deleveraging and Economic Growth

Core Content

This document discusses the evolution of US household debt over the 2000s, focusing on the transition from a phase of debt accumulation to a prolonged period of deleveraging, and the potential end of this deleveraging phase as the economy enters a new credit expansion phase.

Main Phases of US Household Debt

1. Accumulation Phase:

   • Occurred shortly after the Internet bubble burst.
   • Characterized by rising debt levels driven by low interest rates, increasing household income, and financial innovation.
   • Led to a significant rise in mortgage and consumer credit.

2. Deleveraging Phase:

   • Began in 2007 following the housing bubble burst.
   • Driven by mortgage defaults, tightened lending standards, and refinancing with prepayment of debt.
   • Resulted in a reduction of household debt from 130% of disposable income in 2007 to 104% in Q3 2013.
   • Total household debt decreased by approximately $861 billion.

Key Drivers of Deleveraging

• Mortgage Defaults:

  • Triggered by the collapse of the housing market and negative equity.
  • A significant portion of households were in negative equity, leading to strategic defaults.
  • The subprime mortgage crisis played a pivotal role in this phase.

• Credit Crunch:

  • Banks tightened lending standards, leading to a decline in new loan origination.
  • This was a necessary adjustment to stabilize their balance sheets after the crisis.

• Refinancing with Prepayment:

  • Low mortgage rates encouraged refinancing, which led to the prepayment of a portion of debt.
  • This contributed to the reduction of household debt, although it did not fully reverse the deleveraging trend.

Recent Signs of Recovery

• After six years of deleveraging, the US economy is entering a new phase of credit expansion.

• This is supported by:

  • A more dynamic economic recovery.
  • The end of the credit crunch.
  • A gradual improvement in household finances and labor market conditions.

• Credit expansion is observed across all loan types, including mortgages and consumer credit.

• Non-mortgage debt, particularly auto financing, is showing signs of recovery when excluding student debt.

Outlook for Credit Revival

• Moderate Revival:

  • Expected in the short to medium term due to:
    • Structurally tighter lending standards.
    • Long-term interest rate hikes from the Fed’s QE tapering.
    • A limited resurgence of the subprime segment.

• Positive Impact on Growth:

  • A decline in the number of households in negative equity.
  • Improved financing capacity and a potential revival of home-equity loans.
  • Increased consumption and housing market activity.

Historical Comparison: HOLC vs. HAMP

• HOLC (1933):

  • A successful program that helped reduce defaults and negative equity.
  • Provided loan restructuring with principal reduction and interest rate cuts.
  • Led to a lower default rate post-modification (around 4%).

• HAMP (2009):

  • A less successful program that only restructured about 1.8% of indebted households.
  • Lacked a dedicated public body, relying on loan servicers with no strong incentive to modify.
  • Resulted in a high default rate post-modification (around 35%).

Implications of the Deleveraging Process

• The process of deleveraging improved the financial stability of households and banks.
• It created a more sustainable credit environment, although it was not without its challenges.
• The transition from deleveraging to credit expansion is seen as a positive factor for future US growth.

Key Economic Indicators

• Household debt as a percentage of disposable income has stabilized.
• The share of households in negative equity has declined.
• Loan delinquencies have reduced, indicating a recovery in credit quality.
• Mortgage rates have fallen to historic lows, encouraging refinancing.

Conclusion

The US household sector has completed a long period of deleveraging, and the economy is now entering a phase of credit expansion. This is expected to support growth, although the pace of recovery is likely to be moderate due to ongoing tighter lending standards and rising interest rates. The historical comparison between HOLC and HAMP highlights the importance of an effective and incentivized restructuring mechanism in promoting financial stability and economic recovery.

Key Takeaways

• Deleveraging is likely over.
• Credit expansion is expected.
• Moderate growth is anticipated.
• Lending standards remain tighter.
• Interest rate hikes will limit new loan demand.
• The role of government intervention is critical.

Notes

• The document is prepared by economists and not an independent investment research report.
• It is not a personalized investment recommendation.
• Distribution may be restricted in certain jurisdictions.
• No liability is accepted for the information or decisions based on it.