For Leveragettes, Big Debt Is a Way of Life
Californians seem to go further into debt than any other people on Earth. Let’s call them the Leveragettes.
They borrow much more to buy a house; the median home loan in California last year was $145,500--more than four times the state’s typical household income. They’re fearless about buying cars on time; 53% of the more than 25 million vehicles registered to California owners are still being paid for. They also run up their credit card balances higher and take out more personal loans than anybody else would dare to.
This makes them a banker’s dream, as they flagrantly ignore their grandparents’ warnings about going into debt and courting disaster.
Are the Leveragettes living as if there were no tomorrow? Will they panic if the state’s inflated home prices continue to drop and big aerospace layoffs continue to result from the “peace dividend?”
The answer, surprisingly, seems to be no. Perhaps more than any other Americans, Californians have become sophisticated users of consumer credit and creative managers of the household budget. For longer than anybody else, they have been buying on the installment plan and somehow making payments through good times and bad.
The credit for this sophistication about credit must go, in large part, to Amadeo Peter Giannini (1870-1949), founder of San Francisco’s Bank of Italy, which later became Bank of America.
The son of immigrants, Giannini built up his little bank with innovations that made credit easy to get and that have been copied by banks around the world. The most notable were home loans with low down payments and monthly installments, lending to people who were good risks but had little or no collateral and opening convenient neighborhood branches across the state.
His successors went a step further in the 1960s with Bankamericard, which became the first successful mass-market bank credit card and opened the door to vastly increased consumer installment debt in the past 25 years.
Giannini’s legacy continues to turn credit-fearing immigrants from places as different as Taiwan and Indiana into credit-embracing Californians, unafraid to borrow money and amazingly good about paying it back.
One measure of how well state residents handle credit is the relatively low rate of delinquency on loans. Banks define delinquency as being two months behind on payments. Nationally, according to the American Bankers Assn., 2.64% of all consumer debt--from car loans to credit cards--was delinquent at the end of 1989.
But in California, despite its huge and economically diverse population, the rate was just 1.9%. For car loans by themselves, the national rate was 2.03% and the California rate was 1.2%. Maybe that reflects the importance that Californians attach to their cars.
“The fact that we carry more debt here is neither good nor bad,” says Brian O’Hare, Bank of America’s senior vice president for consumer credit cards. “But in terms of repayment, we are better than many other states. People in California treat their credit with respect.”
More is at work here, however, than just a tradition of borrowing to afford the California lifestyle. It has to do with the sense of economic well-being and what that depends on.
Californians enjoy higher personal and household incomes than the nation as a whole. The state’s per-capita income in 1988 was $18,866, more than 14% higher than the national average. The typical household income in California was $30,200 in 1987, about 16% higher than the nation as a whole. That means that people here have more money to spend--and therefore are less worried about going into debt.
The biggest form of consumer debt, of course, is the home mortgage. And in California people spend far more for a house than Americans do anyplace else.
The median sale price of an existing single-family house in California last year was $189,500, up a whopping 65% from 1984. That compares to the U.S. median price of $93,900--up 30% in five years but still less than half the typical California price.
Californians have grown accustomed to, even comfortable with, soaring home prices. It seems to give them an underpinning for all their other credit purchases. After all, so the reasoning goes, if you already owe $150,000 on the house, what’s a mere $20,000 for a car?
Additionally, the comfort of knowing that your house is worth so much money may give you confidence to take on more debt, since the home equity could always be tapped to pay bills.
And, in the tradition of A. P. Giannini, Californians continue to find innovative ways to buy expensive homes and consumer goods. For instance, a growing number of “economic households” are being formed: unrelated people who otherwise could not afford the payments coming together to buy a house or car.
Some of the immigrants who arrived in the 1980s are adapting Old World financing methods to Golden State needs. Many of the state’s new Korean-born merchants, for instance, use investment clubs--a type of private savings pool--to buy their businesses.
And Californians are stretching out their payments ever longer to bring down their monthly expenditures. The typical car loan is now 54 months; a generation ago it was 24 months. The percentage of people who run a balance on their bank credit cards has grown to 50%; 25 years ago, it was virtually zero.
These days, a number of economists are worried about a potential long-term stall in the California housing market. The typical price of a single-family house here dropped by 2% in April compared to April, 1989, the first year-to-year decline in five years.
If the price of California homes stops rising or worse, what happens to the carefree Leveragette lifestyle? If the expectation of expensive houses evaporates, what supports the urge to borrow freely--especially if unemployment begins to rise? In the end, some support may still come from Giannini’s legacy. He made his reputation by offering easy credit to those whose economic lives were shattered by the San Francisco earthquake of 1906.
And since then, Californians have seemed to breathe easy, believing that credit will still be available here in bad times as well as good.
INCOME, ASSETS AND DEBT
MEDIAN SINGLE-FAMILY HOME PRICE, 1989:
U.S.: $93,900
CALIFORNIA: $189,500
MEDIAN PER-CAPITA INCOME, 1988:
U.S.: $16,477
CALIFORNIA: $18,866
MEDIAN HOUSEHOLD INCOME, 1987:
U.S.: $26,000
CALIFORNIA: $30,000
OVERDUE BILLS: Delinquent comsumer debt, in percent:
U.S.: 2.6%
CALIFORNIA: 1.9%
