DIGGING DEEPER INTO DEBT, AMERICA NEEDS SOLUTIONS

I have never been one for New Year’s resolutions. Unless the goal is simple – like eating more ice cream or watching less HGTV – it usually gets abandoned by the second Friday in January (National Quitters Day) or no later than the start of baseball spring training in mid-February!

If there is one resolution that could benefit most Americans and should be taken seriously, it’s tackling our collective debt problem. In this country, we have a love-hate relationship with borrowing – enjoying the “buy now, pay later” mentality while possibly downplaying the long-term responsibilities.

“Buying something you can’t afford means spending more than you make,” warns Ray Dalio, founder of investment management firm Bridgewater Associates. “You’re not just borrowing from your lender; you are borrowing from your future self.”

Debt has become so deeply ingrained in our personal, corporate and governmental lives that it’s often normalized. When mishandled, the consequences can be devastating, impacting individual finances, housing stability and the broader economy.

How much are we talking about? Check out this graphic:

The numbers in the chart show a significant increase since the start of the pandemic. However, further research shows that the picture has recently worsened.

Here’s a breakdown through Q3 of 2024:

Americans hold $1.17T in credit card debt, with the average balance per cardholder now $8,670 – up from $7,500 in 2019, according to Federal Reserve and U.S. Census Bureau data. Including mortgages, car loans and other obligations, household debt has reached a staggering $20T of someone else’s money.

In addition, U.S. companies sit on another $18T in outstanding debt (Q3 2024), and the Federal government’s debt now exceeds $36T, creating significant challenges for economic policy and long-term growth.

That puts the total outstanding debt among U.S. households, corporations and the federal government at well over $70T, according to my estimates. That’s about $20T above the Federal Reserve chart from the previous year. (Admittedly, I don’t know how the Fed got its total of $50T.)

Of the three segments, experts note that federal debt is rising alarmingly. This could “crowd out” private investment, slow economic growth and drive up interest rates – compounding the challenges for businesses, property developers and consumers.

Potentially making matters worse, the incoming Trump administration is seeking to eliminate the government debt ceiling, a topic recently in the news.

Take a look at how the 2025 housing market could suffer from this issue:

Prospective Buyers: Growing personal debt, especially from high-interest credit cards and student loans, can hurt credit scores and make it harder to save for a down payment. Many would-be buyers may delay purchasing a home, especially if mortgage rates remain elevated (around 7% today).

Sellers: Homeowners counting on equity to fund their next purchase may find it harder to sell at desired prices in a market constrained by tighter buyer budgets and higher borrowing costs.

Multi-family and Commercial Real Estate: Rising vacancies, rental pressures and high interest rates create risks for property owners. Some landlords, like Seattle’s Martin Selig Real Estate (paywall), are already signaling difficulties in meeting debt obligations.

Building Projects and Developers: Rising construction costs and stricter lending standards have stalled new projects. For example, Seattle has no major condo developments in the pipeline; they don’t “pencil” in today’s marketplace.

Charting a Path Forward

Debt is not inherently bad; it can drive growth and provide opportunities when managed responsibly. But the current trajectory clearly demands action. Here are a few ideas gleaned from people much smarter than me:

• Consumer Support: Cap credit card and payday loan interest rates to prevent compounding debt. Expand student loan forgiveness programs.
• Small Business Relief: Offer low-interest refinancing options for small businesses and targeted relief for struggling sectors, such as commercial real estate (See Martin Selig, above).
• Government Interventions: Use federal grants and municipal bonds to alleviate local debt while investing in infrastructure. At the federal level, explore tax reforms, spending realignments and policies that prevent unchecked borrowing.
• Financial Literacy: Expand financial education programs, starting in schools, to equip future generations with the tools to manage debt responsibly.

Addressing America’s debt problem will require coordinated and comprehensive efforts from policymakers, businesses and individuals alike. Ignoring it risks long-term consequences, including reduced affordability, housing instability and slower economic growth.

By facing these challenges head-on, we can create a path toward financial resilience and a brighter future. As Dalio from Bridgewater Associates reminds us, borrowing isn’t just about what we take today – it’s about the future we leave for ourselves and the generations to come.

BY THE NUMBERS

>> The number of new households in the U.S. rose by 1.7M in 2023, an 11% decrease from the 1.9M households added in 2022, according to a recent report by Harvard researchers using Census data.?

>> Seattle offers some of the best places in the U.S. to start a career, notes a recent analysis from Elevate Leadership. The leadership development company examined affordability, employment opportunities, quality of life, work-from-home options, and inclusiveness among other categories when reviewing the 50 largest cities in the nation. Seattle came in 4th after Minneapolis; Austin, Texas, and Raleigh, N.C.

>> An all-time high of 42.9M U.S. households – a mix of homeowners and renters – were “cost burdened” in 2023, meaning they spent more than 30% of their income on housing costs, Harvard researchers claim. Additionally, 21.5M households were “severely cost burdened,” devoting more than 50% of their income to housing – another all-time high.

Looking for an updated assessment of the local housing market? Check out my story from Jan. 14: Ho, Ho Hum: December Housing Market Ends with a Whimper

Visit here to read the full January newsletter.