Is It Dangerously High?

CONSUMER CREDIT

CONSUMER credit in the U.S. last week stood at an alltime record of $136 billion, and was still rising fast. Since 1948, total U.S. mortgage debt for homes and farms has jumped from $56 billion to $114 billion. Installment credit, a modest $9 billion seven years ago, has reached a whopping $22.5 billion. This rapid rise in credit has raised a big question among economists: Are consumers so overloaded with debt that there is danger of a great crash?

Actually, the danger of overextended credit is more a bogeyman than real. While the overall public and private debt has increased 50% since World War II, the gross U.S. national product has increased even faster--by 68%-- and consumers' liquid savings are estimated at $525 billion, considerably more than their debts. Thus, most Government economists feel that the current credit market is merely expanding with the U.S. economy. Moreover, the reason for borrowing has changed. Once people borrowed chiefly because they needed money for necessities. But today consumers with good jobs and good prospects borrow because they feel that they can carry more debt, want to expand their scale of living.

As a result, rising consumer credit has been matched almost dollar for dollar by big boosts in consumer income needed to pay off the new debts. The $22.5 billion in installment credit is still less than 9% of U.S. consumers' disposable personal income, and the ratio has climbed barely 2% in 15 years. Furthermore, as the credit load has gone up, U.S. consumers have started to pay off their debts faster. They are now repaying installment loans at a record 11.5% of disposable income v. 9% a few years ago. Farm mortgages, for example, have soared to a 22-year peak of $8 billion; yet farmers are paying them off so fast that the debt is only 9% of the total $90 billion land value v. 25% in 1933. The picture is much the same in home mortgages, installment buying and personal loans.

Nevertheless, there are some soft spots. One worry is the growing number of deceptively easy auto loans that helped push total auto credit to a record $10.6 billion in February. Finance companies have junked the traditional "one-third down and 24 months to pay," and some go as far as no down payment and five years to pay. Both banks and big finance companies such as General Motors Acceptance Corp. and C.I.T. have extended their terms from 24 to 30 months, and in some cases even to 36 months. So far, repossessions have stayed close to the low, prewar level, but few thoughtful businessmen like the overlong new terms.

Another worry is the recent sharp increase in housing credit, particularly in certain Veterans Administration and Federal Housing Administration insured loans. In February the VA, which already has $27 billion out in loans, got applications "for 104,000 more loans, the highest monthly total since October 1950, and 86% more than a year ago. Almost 40% of the VA's loans require no down payment, give up to 30 years to pay, thus putting consumers in debt for too long a time. Some no-down loans even cover the mortgage closure costs, while in Texas one lender advertises a $50 cash premium with each loan signed. However, repayments are being made on schedule, and defaults on VA loans have dropped to 1.1% in January 1955 v. 1.7% three years ago. Bankers who felt that the loans were increasing too fast think that this type of credit is already tightening. VA loans are dropping below par value, thereby boosting interest rates, since banks and other holders can get rid of them only at a discount.

FHA is also tightening up on loans. In January FHA insured $931 million worth of new home construction, nearly double the amount of a year ago. But in the past few weeks, FHA has started to dampen the boom. In Dallas last week, FHA announced that it would make no further firm commitments on purely speculative housing, i.e., with no buyer signed up. In 17 other areas, e.g., Fort Dix, N.J., Portsmouth, Ohio, Paducah, Ky., primarily where defense-stimulated expansion has mushroomed building too rapidly, FHA has also rationed the number of loans it will insure, sometimes cutting builders' applications by as much as 90%. Private bankers are also tightening up, pressing for shorter terms on private loans. Last week a group of top insurance executives recommended that VA require a 5% down payment on loans and that it shorten the terms to 25 years; they also wanted FHA, which already requires 5% down on its loans, to boost payments to 10%.

Overall, Government and most private economists believe that consumer credit is still within limits. The big upsurge is due to the fact that more people than ever are able to buy more goods. Barring a drastic recession in the near future, which no economists expect, it looks as if consumers will be able to pay off their present debts--and keep right on buying.

This file is automatically generated by a robot program, so reader's discretion is required.