Long Run Growth in Mortgage and Consumer Credit: New Perspectives *

The current credit crunch and volatility in the financial markets is primarily blamed on two circumstances: some consumers’ misuse of mortgage credit and some mortgage lenders’ making credit available to borrowers who could hardly satisfy their credit obligations. This is an ideal time to reexamine the long-run experience concerning consumer’s use of both mortgage credit and non mortgage consumer debt. We examine whether or not American consumers have increased their debt obligations beyond what would be justified by their incomes and other economic circumstances. This paper explores potential explanations for the growth of consumer credit within the context of the consumer sector’s general financial condition and other macro-economic factors over an extended time period covering the post World War II years, with particular attention to the differences between nominal and real debt, adjusted for price increases, and whether credit and debt have expanded more rapidly than aggregate disposable income. There are surprisingly few recent analytical research studies to support or to dispel the reports of long-term explosive use of mortgage and consumer credit. A multivariate analysis for 1946-2006 shows that higher real incomes, lower interest rates (costs of funds), and greater levels of assets explain larger amounts of mortgage credit outstanding, with long term mortgage credit income elasticity of 0.54. In contrast, income elasticity of consumer credit is only slightly less than 1, when account is taken of the additional factors of long-term interest rates, the macro economy – represented by unemployment – and real mortgage lending. This is a very different conclusion than is usually presented when only a univariate analysis or simple graphs of consumer credit are presented, as is often the case.