Millennials Have Never Been More In Debt, And It Is Creating A Major Risk For The Economy

There is a seemingly unlimited number of disconnects in financial markets these days, not the least of which is the shocking divergence in recent years between the ever plunging unemployment rate in the United States and stubbornly rising delinquencies on consumer debt. In fact, according to a note published earlier today by UBS strategist Matthew Mish, that divergence continues to soar to all time highs with each passing month...but why?

As it turns out, the answer to the enigma above may just have something to do with the fact that, despite declining unemployment levels, wage growth remains completely non-existent at a time when consumer leverage, particularly in the form of student loans and auto debt extended to the most financially vulnerable cross sections of the American public, is soaring.  Let's explore the data from UBS...

Per the charts below, when you break out rising consumer delinquencies into their individual buckets the catalyst for the trend above suddenly becomes more clear.  While delinquency rates on mortgages, HELOCs and credit cards are improving, or at least not deteriorating rapidly, delinquency rates on student loans and auto loans are a completely different story.

90-day delinquency rates on consumer loans are up 20bp to 7.61% Y/Y, led by deterioration in auto loans. Trends in recent loan vintages suggest a negative outlook on balance, but incremental deterioration is shifting from autos to credit cards and student loans. This is worrying as it indicates broader weakness in non-prime consumers.


For one, auto and credit card loan default rates bifurcated by credit quality (e.g., prime, subprime) continue to show sequential deterioration on average. This worsening performance in part can be explained by weaker underwriting standards and risk layering: i.e., higher loan-to-value ratios and longer loan terms. For example, negative equity was a contributing factor explaining home mortgage defaults, and is now one factor influencing rising auto loan delinquencies. Further, multiple interest rate hikes by the Federal Reserve have increased average interest rates in particular on new car loans from finance companies (from a low of 4.4% to 5.6% on 60m loans)) and for rates on credit card balances (from a low of 12.7% to 14.9%, Figure 5).

And who took on all those $40,000, 0%, 80-month loans all so they could drive around in a brand new BMW they couldn't afford?  Well, if you guessed millennials in the lowest quintile of wages earners in the country then you're absolutely right!  As Mish points out in Figure 7 below, the median debt-to-asset ratio for Americans under the age of 35 has surged over the past couple of decades from ~40% to a staggering 100%.

Second, aggregate consumer credit metrics mask substantial inequality across consumers. Leverage metrics, e.g., debt to assets, are at or near record levels for lower income and millennials, and the literature draws a clear linkage between lower savings and higher defaults. While interest coverage has improved, it is overstating consumer health. We do not believe these metrics are adjusting for inequality in individual income/ wealth, a decline in the US homeownership rate, and student loans in deferral status.


First we calculated median leverage levels based on debt to assets across income and age cohorts; for lower incomes (0-20, 20 – 40th percentile by income) and younger ages (less than 35, 35-44) the results suggest ratios are at or near record levels (Figures 6, 7). Median leverage measured by debt to incomes (DTI) are also at record levels for lower income households (0 – 40th %ile), while millennial (under 35) debt-to-income ratios are in-line with 2007 levels. Strikingly, DTI ratios for 3544yr olds are materially lower even though prior leverage metrics are near record levels, likely reflecting the reality that middle age households have deleveraged via mortgage debt defaults but now currently have low asset bases (Figures 8, 9).

So what does this all mean for future credit growth?  Apparently, absolutely nothing as UBS figures that banks will just continue with their reckless lending practices until something breaks.

Second, the supply side of credit to consumers is supported materially by federal credit support, primarily mortgage and student loans. We estimate roughly $825bn in net loan creation this cycle in mortgage and consumer-backed loans (2010 – 2017); however, the share of non-government backed loans has actually been negative to the tune of $677bn (vs. government backed loans at $1.5tn, Figure 21). The implication is consumer lending to a large extent is essentially on autopilot, with changes in loan standards likely to be inelastic and lagging severely any rise in delinquency rates.


Third, the supply of credit in consumer loans less impacted by government credit support (e.g., auto, credit card and personal loans) remains relatively accommodative. The rise in delinquency rates has triggered some tightening in underwriting standards (e.g., autos, credit cards), primarily from more conservative lenders including banks. But the magnitude of tightening has been modest (Figure 22) and competition has attracted new lenders to largely fill the void – e.g., in autos finance companies and credit unions13. And any stabilization in delinquency trends should support stable credit supply trends.

Conclusion, lenders will continue to bury their heads in the sand and ride the ponzi wave in student and auto loans until it once again blows up in their faces.


Scar Bro Paul Kersey Wed, 10/11/2017 - 21:11 Permalink

I wish everyone would stfu about millenials. Its just stupid. Young people are in debt? What? cause old people kept interest rates low for so long. I mean EVRYTHING runs on credit. the country runs on DEBT FFS! Have you seen the national debt? Can't blame the millenials for that.. unless your brain's been damaged. I mean doesnt anyone feel even slightly protective over these little shits? I have several that work for me and I'm sure when I was that age I was just as dopey. The only reason I didn't get into so much debt was because I was never offered it. I do remeber getting a loan of about 10k after I got my first job. Blew that on my girlfriend at the time.Incessant wars cost money. A bunch of students in debt for drinking money is NOT a national crisis.

In reply to by Paul Kersey

techpriest Scar Bro Wed, 10/11/2017 - 22:02 Permalink

I'm an older Millenial, born in '85. My head was up my ass 10 years ago, and I figured it out and started getting things together around the time I turned 25.

The main thing is, if you know what's going on and have a little success, take the opportunities to mentor these kids. Encourage the young Millenials/older Gen Z kids to forego the $200k X Studies degree in favor of more practical professional education at 1/5th or less the price.

From what I can tell there has always been anxiety about the next generation, but for the mid-20s kids I teach coding to, I see a lot of people who are eager to learn, and could be powerful for the future. I, for one, was tired of lsitening to John McCain snarling about "libertarian kids in their mom's basement." As one of those libertarian kids, I'm going to become totally debt free in less than a month (including the house!), am starting to make enough on my side business to start hiring guys part time, and soon enough I will be able to start supporting some candidates locally, to get the tiny house movement going so more "libertarian kids" can become financially free and present a rapidly growing force against globalism.

In reply to by Scar Bro

techpriest Hulk Thu, 10/12/2017 - 01:37 Permalink

I'm about to send in the last check (sold some stuff and halted improvement projects because payments suck, and I knocked a year off the mortgage that way), and looking at the new financial situation, I'm really, solidly convinced that debt = slavery, and debt comes from the snare of comparison (buying what you don't need with money you don't have to impress people you don't like).

I'm a few days from getting everything finished, and I can feel the perspective change. When you don't have to have both spouses working just to pay the bills, and when I only need about half my current income to survive, all of a sudden a whole new world opens up. You have more power to say no to raw deals.

Meanwhile, if you looked directly at us, you wouldn't see anything special. If anything, we look a little broke because we have cheap furniture, we don't hire a landscaping company to mow our lawn, cars are average, etc. But you can't care about that because once you do, you put yourself on the hook for all kinds of meaningless expenses.

In reply to by Hulk

bigkahuna techpriest Thu, 10/12/2017 - 07:38 Permalink

Congrats! Most with your story come from the older crowd. It will truly allow your family to live a fuller life - it is more than money.If more Americans of all ages would just stop bitching and start climbing out of the hole (implied stop digging deeper) more could also enjoy this freedom.Do your best politically - when you find that the system is fucked and the sheep do not care - well, just use balance here, do not let it consume you.

In reply to by techpriest

Tarjan techpriest Mon, 10/16/2017 - 11:01 Permalink

You are so right. I was able to enter retirement at age 66 debt free - no mortgage, no car payments, etc. and am presently able to live on half of the retirement income, putting the rest aside for future medical costs. Living overseas is also a big help. Nevertheless, I have always hated debt and living debt-free is really freedom.

In reply to by techpriest

Antifaschistische Scar Bro Wed, 10/11/2017 - 21:50 Permalink

oh, since you've hired a few...allow me.  :)don't bother giving them a raise...if you give them a $5,000 per/year raise...they'll go buy one of those $40,000 cars.   If you give them a $10,000 bonus, they'll upgrade their home and add $100,000 to their mortgage debt load.   The best thing you can do for cut their pay and offer them free lunches.  :)

In reply to by Scar Bro

techpriest Antifaschistische Thu, 10/12/2017 - 01:42 Permalink

Depends on the person. If the attitude is one of spending to the limit, then you could pay them a million a year and they would still be living paycheck to paycheck.

But, a few young folks are calling BS on the debt slavery. I learned it from a friend: he drove the crappiest car in grad school and lived in a used trailer. But in 2 years he owned both, and was living rent free and saving money on a grad student salary. Dude was never worried about anything - I took me an extra 5 years to figure out that he was doing it right.

In reply to by Antifaschistische

Davidduke2000 Wed, 10/11/2017 - 20:49 Permalink

I watch them on judge judy  the joo and they are out of work and have no money, the car gets repossessed and they get evicted from their apartments and the collection agencies are after them to pay the last 10 month back payments. 

Swamp Yankee Wed, 10/11/2017 - 20:48 Permalink

Cash is king Debt is dumb The paid-off home mortgage is replacing the BMW as the status-symbol of choice.  -Dave Ramsey loves you. Wanna be a rebel?  Buck the system?  Piss-off 'the man'?  Live debt-free; they HATE that. Long on freedom and the dollar store.

Deep Snorkeler Wed, 10/11/2017 - 20:52 Permalink

I made it through college eatingcanned porknbeans over chicken feed pellets.My summer job was hand loading 100lbcement bags on pallets in 100+ heat.It learned me good. Real good.