Americans Shedding Debt, Led By Mortgages

Recent Fed data shows total household debt is falling.

By + More

Consumers just aren't borrowing like they used to.

According to the Federal Reserve, total household debt is falling—albeit slowly—a sign that Americans are chipping away at debt racked up during the boom years.

But don't cheer just yet. Although consumers shaved off nearly $40 billion from the collective debt tab in the third quarter of 2011, they still owe more than $13 trillion dollars leftover from the borrowing binge, which includes everything from credit cards to auto loans to mortgages.

Still, Americans are getting rid of their debt slowly and surely, especially outstanding mortgage debt, which hit a near five-year low in the third quarter of 2011.

[See the latest political cartoons.]

That decrease is due to a combination of factors, economists say, ranging from foreclosures, bankruptcies, and simply weak demand for housing. Still scarred from the subprime fallout, banks have also been less willing to lend, further restricting the flow of mortgage credit.

"The process is still ongoing," says Greg Daco, economist at IHS Global Insight. "The decline in home prices has reduced movement and activity in the housing market both on the selling side and on the buying side. People don't want to sell because they're waiting for prices to stabilize or go up, and people don't want to buy because they're waiting for prices to continue to fall."

But that picture could change in 2012 as the employment situation improves. Economists expect the economy to add more jobs in the New Year, which almost always generates demand for housing and consequently, home mortgage credit.

While mortgage debt is trending downward for the time being, consumer credit—such as credit cards and auto loans—increased more than one percent in the third quarter, a sign that consumers could be feeling a bit more confident about spending.

Spending and borrowing isn't necessarily a bad thing, Daco says. "In an economy that's growing with low unemployment, modest amounts of debt aren't bad," he adds, because credit availability helps fund bigger purchases such as homes and cars, which stimulate economic growth.

[Read: The 3 Financial Shocks of 2012.]

Still, a society driven by credit consumption can produce the overborrowing and overspending that helped cause the financial crisis. "A society that's based mostly on credit spending is not necessarily a good thing," he says. "Once things turn bad, like we have been experiencing for the past four years, consumers have a hard time continuing to spend so you see a big dip because the availability of credit isn't there anymore."

Experts predict consumers will continue to shed debt, but probably at a slower rate going into 2012. "People sometimes have a short memory, but I wouldn't think people would go out and get themselves into as much debt as four years ago prior to the recession," Daco says. "Just maybe there has been a shift in mentality that support less of a credit-driven consumption pattern."

Twitter: @mmhandley