Millennials don't need cars? Their debt loads say otherwise

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Adults in their 20s, many of whom are shut out of the mortgage market, have emerged as a vital customer segment for auto lenders and, to a lesser extent, credit card issuers.

Car loans and credit cards accounted for 23% of all debt held by consumers ages 18 to 29 at the end of the third quarter, a larger percentage than for any other age group, according to a report released Friday by the Federal Reserve Bank of New York.

The report is consistent with some of the conventional wisdom about millennials’ financial lives, including the idea that many of them are unable to buy homes because of student debt burdens. But it throws cold water on other narratives, such as the idea that 20-somethings who came of age during or after the financial crisis of 2008-9 are debt-averse.

The report also undermines the notion that young adults who have flocked to urban areas do not need cars.

In total, Americans held $13.5 trillion in debt as of Sept. 30. After declining steadily in the years following the crisis, household debt has now increased in 17 straight quarters.

Adults ages 18 to 29 had $960 billion in debt at the end of the third quarter, which was only about one-third of the amount held by consumers in their 30s. But mortgages and home equity lines of credit accounted for more than 80% of the difference in total debt between the two age groups.

Consumers in the youngest age bracket held $580 billion in car loans and student and credit card debt, which compared with $900 billion for those between the ages of 30 and 39, and $780 billion for consumers ages 40 to 49.

Those in the youngest age bracket now account for 13% of all auto loan debt outstanding in the U.S., the report found. That was roughly on par with consumers in their 60s, and only about one-third below the amounts held by folks in their 30s, 40s and 50s.

Home purchases, though, remain out of reach for many young adults as housing prices have soared in some parts of the country and qualifying for a mortgage remains difficult.

"Tighter mortgage underwriting during the years following the Great Recession has limited mortgage borrowing by younger and less creditworthy borrowers,” economists at the New York Fed wrote in a blog post published Friday. “Meanwhile, student loan balances and participation rose dramatically and credit standards loosened for auto loans and credit cards.”

The data suggests that it will be much harder for 18-to 29-year-olds to accumulate wealth than it was for older generations, which typically relied on home equity in order to build a nest egg. Rising interest rates are now adding to costs for first-time homebuyers.

The report released Friday also shows that the youngest borrowers present significantly bigger default risks for auto and credit card lenders than their older peers.

During the third quarter, 4.18% of all auto loan balances held by consumers ages 18 to 29 became 90 days or more delinquent, compared with 2.66% for consumers between the ages of 30 and 39.

And 7.52% of credit card balances held by the youngest age group became 90 days or more delinquent, compared with 6.0% for those in their 30s.

Those numbers represent a reversion to the situation before the financial crisis, when the youngest borrowers presented the biggest risks. The rates of serious delinquency on auto and credit card loans converged for different age brackets between 2009 and 2012, but in the last few years the youngest borrowers have again represented the biggest risks.

“Older borrowers have longer credit histories with more borrowing experience, as well as higher and typically steadier incomes; thus they often have higher credit scores and are safer bets for lenders,” the New York Fed's blog post stated.

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