Americans' household debt keeps going down

Americans continued cutting back on household debt in the third quarter of the year as declining mortgage balances outpaced rising student and auto loans, the Federal Reserve Bank of New York said Tuesday.

The data suggest that households are taking a judicious approach to their finances by whittling down their largest source of debt, while slowly increasing more limited types of borrowing.

Household debt fell by $74 billion, to $11.3 trillion, in the three months ending in September. Mortgage debt, the largest component of household borrowing, shrank by $120 billion, to $8.03 trillion, the lowest level in six years. The decline reflects a reduction in home loan balances, foreclosures and home equity lines of credit.

Although some 242,000 Americans lost their homes to foreclosure in the last quarter, economists at the Fed noted a slight reduction in foreclosures, which are slowly returning to pre-crisis levels. Originations, meanwhile, climbed for the fourth consecutive quarter, to $521 billion.

"The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position," said Donghoon Lee, senior economist at the New York Fed.

Consumers showed a willingness to take on new debt, with borrowing outside of the home climbing 2.3 percent, to $2.7 trillion, in the third quarter.

Student loan balances rose 4.6 percent during the quarter, to $956 billion.

"People are very interested in investing in education right now, partly because it's a tough job market," said Karen Dynan, co-director of the economic studies program at the Brookings Institution. "They can't find work, and also to get the jobs they'd like to have, they need more skills."

Dynan also said families no longer have the financial wherewithal to send their children to college without taking out loans, adding that "financial conditions are still really tight for a whole lot of households."

Outstanding auto loans grew by $18 billion, to $768 billion, the highest level in nearly four years, according to the Fed. Auto loan originations rose for the third consecutive quarter, to $85.8 billion, an increase of 4.4 percent.

"We're seeing a release of pent-up demand," Dynan said. "Now that people are willing to take a chance and financial institutions are willing to give them credit, they are finally able to replace their aging autos."

Balances on credit cards grew by $2 billion, though consumer demand for credit continues to decline. The number of credit inquiries, which totaled 167 million at the end of September, fell for the third consecutive quarter.

Americans have reduced their debt by nearly $1.4 trillion since the summer of 2008. Nearly two thirds of the reduction is attributed to the cancellation of debt through foreclosures and charge-offs that spiked during the financial crisis, according to the McKinsey Global Institute.