Household Debt in America: Audience Q&A
For the question-and-answer portion of this "Dialogue with the Fed," Schlagenhauf is joined by moderator Julie Stackhouse, by Carlos Garriga, research officer and economist at the St. Louis Fed and by Brian Noeth, policy analyst at the Center for Household Financial Stability at the St. Louis Fed.
- Part 1: Julie Stackhouse, Introduction and Welcoming Remarks (6:25)
- Part 2: Don Schlagenhauf, Presentation (1:05:31)
- Part 3: Audience Q&A (21:44)
Julie Stackhouse: So I know there were some questions that didn't get answered. Since these guys are sitting maybe we can get one or two questions queued up. Does anyone have a question? Yes, way in the back. Can you please use your mic?
Question: Thank you. I see that mortgage is debt is quite the powerhouse that it is. I'm curious with your data and does it model and predict where other industry sectors will hit a bubble, and specifically higher education? The rate of student loan debt seems to outpace in terms of percentage all the others, and I'm just curious if higher education is the next sector to really—
Brian Noeth: Yeah, I've never been in love with the term bubble with higher education because usually when you think of the term bubble you're thinking of the asset price. And so with housing you have an asset bubble. With higher education it's not so clear what that actually means. And as far as if you're thinking of it from like a systemic risk most of it's held by the U.S. government or guaranteed. So I don't see it, you know, seeing like that all-out banking run like you saw. But yeah, it kind of depends on how you define the term bubble.
Julie Stackhouse: So and if I could add a little bit I'm going to make you make me honorable in making sure I don't get the statistics wrong. But yeah, something roughly 90 percent of student debt is held by the U.S. government so it's a fiscal issue. But it's not going to produce a crisis like the housing issue did where the debt was held in the private sector by investors. I don't know if that makes you sleep better or not but the worries are a little bit different. On the other hand as we've looked at the level of student loan debt it's pretty complicated when you look at that $1.2 trillion of debt to say what is really causing the growth in debt because there were more students taking on debt. Of course in a recession not too surprising that we had more people going back to college. Second, we talked a little bit about it, this cost of higher education. It's hard to get your arms around it but we know the cost of higher education is going up and state funding at the same time in many states was being diminished, so just to go to college you may have had to pay more. But yet as you look at the other side of it which is where are the delinquencies—and again you can provide the detail. The delinquencies in student loan debt interestingly are right about the $10,000 level of student loan debt. Am I pretty close on that?
Brian Noeth: So I haven't seen a good measure on like where the delinquencies are occurring.
Julie Stackhouse: The amount of debt.
Brian Noeth: Yeah, so I look at it more from like the institutions that—and you know the common refrain in the popular press is that, you know, it's these $100,000 mortgage, or student loans that are a big issue. And if you think about the people that are taking out these $100,000 loans, you know, doctors, lawyers. Not that this isn't a worry but it's maybe not so much of a worry that a lot of the big delinquencies are occurring in community colleges and for-profit. And so you might not see these huge balances occurring but, you know, if people aren't getting jobs, you know, these little amounts of debts can be a big burden.
Julie Stackhouse: So and I think the worry—and then I'll turn it back to these two—is maybe not is it the next crisis but what other behaviors might it introduce? So I have a 27-year-old. First of all he is just getting out of college because now it's not four years; it's like eight years, which I didn't know at the time so that was a surprise to me. And he's just learning, you know, to be a household. And by the way he doesn't plan to stay where he is right now very long. So some of the things that were important to me when I formed a household, like I have to buy a house so I can have a family and have kids, he has no interest in. And oh, by the way, his girlfriend does have $200,000 of student loan debt because she got her PhD so they need to work for a while to be able to pay that off. Those are the things that we're really wondering about. What does that mean in terms of some of the spending, taking on mortgages and other things? And you know the answers are not there yet. Any thoughts on that, Carlos?
Carlos Garriga: I mean I completely agree with your comments. I mean one of the challenges with student performance whether there's a bubble or not, I mean at the end it all is going to depend on whether these guys end up working, right? So if there's a prosperous labor market these guys will find good jobs and then paying it off is not an issue. What makes, you know, human capital, if you want to call it in this particular way, different as opposed to housing is that you can move people around whereas homes you cannot move them around. You cannot take housing from, you know, certain states like Michigan and move it to California whereas you can move workers from one state to another. So it's, you know, that's what makes it so different, right? So if certain areas are not developing jobs or some areas that are growing, you can take all these human capital, you know, people with college degrees and find them a job. And worse comes to worse they might have to leave the country and work elsewhere, but still they might be able to, you know, pay their student loans if they're well educated. So I mean I think that's what, you know, differentiates the mobility factor from housing. But which is true, though, is that, you know, it's all going to depend on what happens in labor market, right? In some sense when people go to college and they take a particular degree they assume that that's going to pay off by the time they graduate and they try, you know, they prosper in the labor market there will be the good job that they worked so hard for. And if that job is there that's not an issue. But if that job is not there five years from now, 10 years from now, with a particular track, then they might need to reconsider and I need to look for that job elsewhere. But I think, you know, we don't know what's going to happen five years from now, 10 years from now. The labor market could be different. You got new technologies. You got a global environment so, but the advantage from human capital is that mobility. People can move around. So that should not be that big of a concern going forward compared to, you know, the housing phenomena that we had.
Don Schlagenhauf: I have a very simple comment. I'm going to view it now as a recently, or ex-professor that's recent. I asked my students two years ago what did they expect their starting salaries to be as undergraduates. And they said, "Oh, I think I'll be making $45,000 a year." And I asked them, "What are your skills?" and they go, "I got a degree from Florida State." I said, "No, no, no, no. What are your skills?" That's what's important because people get hired if they have the right skills. And if you're just a generalist you may have a hard time. So my only advice if you're advising relatives is a college degree is useful especially if you have marketable skills and you can think.
Julie Stackhouse: That's usually a good idea [laughs]. We've probably beat that one up a little bit but hopefully I've left you a little bit of an idea of it doesn't look like this is going to be another housing crisis. But could there be a longer-term economic effect? Maybe because these kids are at a different spot. Yes, right there.
Question: It's been said that as students are accumulating more and more debt, one, there's the problem of the students who accumulate the debt but don't end up getting the degree and finishing or whatever and end up not getting the increased income. But even those who are successful in a good program and do get their degree or two back, the student debt is having—and this is something that's presumably still to develop—but that that's putting off them buying their first house. That may be putting off them buying a new car as opposed to considering to use old cars and that to the extent that—it's my understanding that for instance if you buy a house, that's a multiplier. You buy the house. You then buy the furniture. You then buy the equipment for the house, the appliances, blah, blah. So that's a positive impact on the economy to the extent that certain numbers of young people with substantial student debt are putting that off. The debt isn't necessarily different. I mean instead of mortgage debt they have student debt but that multiplier is being postponed and may be starting to become a negative impact on our economic growth. That's a question, believe it or not.
Julie Stackhouse: So, Carlos.
Carlos Garriga: Maybe there's a weaker impact if that's the case. But I mean at the end young people got to live somewhere if they don't live with their parents. So if there's not enough housing they'll build some housing that maybe their parents will acquire in terms of landlords and they will rent it out. So they end up living somewhere else. Might not be that big of a house and therefore they won't have that many rooms, therefore they won't need to purchase that much furniture and maybe the apartment will be a bit smaller so the 60-inch TV won't fit in there. They might go with a 40. So, you know, to that extent there's a lesser multiplier effect if you want to call it that way. But still they got to live somewhere if it's not in their house and somebody's got to provide housing. So somebody else will still go and make the housing investment in form of landlords. Or maybe parents won't be buying homes for, you know, their kids but they will invest in real estate in forms of rental property. So I think—
Julie Stackhouse: He hasn't had a kid move back into the home yet [laughs].
Carlos Garriga: But I have to worry about the college before, so. So sure, maybe a lesser multiplier but doesn't mean that there won't be some action coming out of it.
Julie Stackhouse: Was there a question? Yes, ma'am.
Question: Thank you. I had a question even on a more micro level. What are you doing if anything in terms of outreach in the St. Louis community? The city has a very, 27 percent poverty rate and so I’m just curious. Your programs that you have up there on the screen, what kind of, if any, direct outreach do you have? Perhaps SLPS or—
Julie Stackhouse: Yeah. So I can take that one. We do have a function. Each Federal Reserve Bank does. It's not huge. We are Federal Reserve Banks. But it works with primarily the organizations that work with the communities, particularly low- to moderate-income communities in the Eighth Federal Reserve District. So this can range from groups like the Saint Louis CRA Officers Association to housing groups like Beyond Housing to other activities where we try to get the pulse on what's happing in St. Louis. One example is work done with Washington University a few years ago to look at banking habits of individuals in the city of St. Louis. So there are two things the Federal Reserve can do. One is serve as a, we call it a convener, bringing groups together that might not otherwise get together to be able to address those issues. And second, this is a fabulous facility, right? And in another week Washington University is going to be offering a session on childhood development, a very important issue. As these children go so does their future. And so hosting those events and providing facilities is something else where able to do within the mission of the Federal Reserve. So hopefully you've had a chance to do that. There's a ton of information on the Federal Reserve's website on those programs as well as a link to a broader website that gives you all the Federal Reserve's programs. Oh my gosh. I don't know where to start. Okay, go ahead.
Question: Thank you. I understand that there's a lot of moving parts to this question, but I'd be interested in getting some perspective on the classic question rent versus buy. And what advice would you give to someone thinking about purchasing their first home?
Julie Stackhouse: He's young. Let's have him answer that.
Carlos Garriga: If you're under 40 you answer. If you're over 40...
Brian Noeth: I don't know if I'm ready. I'm still a renter. So.
Julie Stackhouse: You're not helpful.
Brian Noeth: Yeah, so I might not be the best person to answer that but I mean I would say it depends on where you're at. I mean you want to be able to reasonably pay down your mortgage. And I think people forget sometimes that housing is a risky asset. It is prone to shocks and it's a very large asset and it's one of kind of the only assets that we take a lot of leverage out on. So that inherently makes you vulnerable. But I do think there is a place and time for housing. As far as, you know, individual, I can't speak to that.
Don Schlagenhauf: Let me say two things because for most of my life I viewed housing as a great investment. I got to tell you a little bit more. I lived in Arizona during the housing boom and I moved to Florida during that housing boom. I also stayed too long in Florida and I was there during the crash. If you look at the data it turns out that the real rate of return on housing, just as a finance investment, is lower than the stock market. So unless you're in special markets—San Francisco, New York City, Phoenix, where they're hot places to live—you probably should expect that rate of return. My understanding is that's about the rate of return in St. Louis. Now that doesn't mean everyone should rush to be renters because remember, that house gives you consumption benefits. You have to value those. And, you know, I valued having the space. Now at this stage I'm becoming a renter because I don't want to go—I don't have that long a profile where I'm living, so I go I don't want to deal with the transaction costs, which are high now. But you got to view now housing as more of a consumption good.
Julie Stackhouse: If you didn't have a chance to participate in a session about a year ago Ray Boshara of the same group that Don is involved with talked a little bit about family balance sheets. So following the financial crisis balance sheets took a hit because of housing. The people that lost the most had the most invested in housing from the standpoint of their balance sheet. And as Ray looks at this and looks over time, again, housing has benefits from the standpoint of stable families, stable neighborhoods. There's a lot of good things. But if you're betting your retirement on it, it's a risky bet. And so I think that's the question we're all looking at. Are there other ways? Are there other policies that can provide more balance and both create the stability for the family but also the gain of wealth for the longer term. I know we are really close on time. Let's just see if we can take maybe a couple more questions. Oh gosh. Way, way in the back because I always miss the back.
Question: So I was thinking about the trend among millennials about changing jobs every few years or moving to a new place every few years. How would that affect the income and the debt for that age group?
Julie Stackhouse: Mr. Millennia.
Brian Noeth: Okay.
Julie Stackhouse: Can you repeat the question just in case?
Brian Noeth: Yeah. So I think the question was based on mobility in millennials. I think the job market is kind of different. You're not seeing people stay at the same job for 25 years like they used to, or 50 years. The thing about mobility, I actually kind of like that. I think a mobile labor force is something good. You know, if people are moving to where there are jobs I actually think that's a good thing for the economy. Then maybe somebody else can...
Julie Stackhouse: Carlos?
Carlos Garriga: I mean it's you know, it's got to be good for the construction sectors in some of these areas where people are moving. It won't be so good in some of these areas where people are leaving, but that's going to be the nature of the game. I mean there's going to be some areas that are going to be winning population and those whole areas are going to be booming, and there are some other areas where for whatever reason business won't be locating and that's going to be a challenge for those areas. But that's something we can't change. I mean that basically it's dictated by, you know, where jobs are created and businesses figure out what's the best thing for them and what's the best location. So but it's true though that going forward I mean mobility is going to be a key for young workers.
Julie Stackhouse: So you will be interested I think in going to the St. Louis Fed website and this Household Financial Stability section. There's some nice papers out there that talk about millennials or different generations and wealth. And baby boomers that are in the audience, congratulations. You are probably the last generation that was wealthier than your parents. As we get into the younger generations at least what the data shows now is they are not building wealth at the same pace that their parents did or the baby boomer generation did. And there's a lot there. Now you say, "Well thanks a lot. I wasn't here tonight to hear that story." I really use it at least with my own kids as a point of reflection of there's always choices that will be made. There are people on each end and so I personally use it as coaching opportunity to say think about the choices that you're making. I don't know if you'll do that or not but I think you'll really be interested in the literature that's out there.
Carlos Garriga: Let me just a quick note, you know. But the younger generations have goods that, you know, the baby boomers back in the day did not have, right? So when they were young they didn't have iPads or iPhones, so the consumption bundles that we get to enjoy nowadays, even though we have potentially less wealth, are very different. So I mean we can measure wealth as one metric. But there's other things that are available nowadays that allow for more consumption at a much lower cost than what we had back in the day. So it is, you know, lower wealth doesn't mean, you know, less happy. I think it's something important. I have a colleague of mine that says now young people might not be searching for a job because they can listen to music for free; they can watch a movie for free. All they need is a Wi-Fi connection from a coffee place and they can spend the whole day whereas back in the day you didn't have money you couldn't buy records, you couldn't watch TV. Nowadays it's all free and [unintelligible] measures. So I think that's an important thing. So there's other forms of wealth that are not dollarized.
Julie Stackhouse: So you can see why I love working with economists. I'm like well yeah, who cares? It's all about saving for retirement. It's good. We have great debates.
Brian Noeth: And I should just add that, yeah, there is a lot of evidence that people maybe aren't accumulating wealth early like they used to. But you know it's highly uncertain going forward so it's very tough to even kind of guess on these long-term trends.
Julie Stackhouse: He's obviously not been a parent yet so I'm going to use this to an advantage. Okay, sir. We'll take one more question. Question: I just wanted to, my question that's going over in my mind is how is this job mobility, would it affect or I don't know if the Fed even does this. Is that having an effect on family stability in the country?
Julie Stackhouse: Job mobility and family stability? I don't know.
Question: Well they say people are waiting longer to get married, waiting longer to have families, young people because I'm assuming something that has to do with—
Carlos Garriga: Well there's a lot of trends that have been changing since the 1970s, so it's not clear what's the new normal when things have been changing for pretty much 40 years, right? A lot of things change when you know there was a significant entry of females in the labor force and a lot of family formation has been changing ever since. So it's really difficult to pin down that's the way things used to be and now they're different. I think they've been, you know, evolving and I think they will continue to evolve. And obviously there will be different patterns of formation and that's going to have an effect in the rest of the economy in the type of goods they buy and when they buy and when they save. So it's really hard to say the old way was better than the new way. I think that's kind of the new reality and maybe 10 years, 20 years from now we realize well that's the new norm whereas back in the day that was the old norm—certainly things are evolving. There's people acquiring more education. They're going to be moving around before they might settle. They might not even settle. I mean a lot of things are changing in the labor force, and going forward there's a lot of expectations on how people will, you know, operate at their jobs, whether being in a particular location will be that important or not and what type of skills will be required, you know, 10 to 20 years from now. So you know there's a lot of things that will be changing in the next few years so it's really hard to pinpoint that.
Julie Stackhouse: It's a great point. If I even think of it within my areas the number of individuals I'm employing that work for me, particularly people like instructional designers. We do a lot of education here at the Federal Reserve. They can be anywhere in the country. I may employ them and they can be anywhere. It is changing. And so yeah, what are the ramifications? It will be interesting to see. I know we've kept you a couple minutes late. These guys I think will be around for a few minutes if you want to come up and ask a question. We really want to thank you for being here tonight and I know we'll soon be getting out our next topic and hope you can join us again in the new year. So thanks for coming tonight.