Household indebtedness rises to $16 trillion as inflation rises and interest rates rise

A “For Sale” sign outside a home in Albany, California, US, on Tuesday, May 31, 2022. Home buyers face a deteriorating affordability situation with mortgage rates hovering around the highest levels in more than a decade.

Joe Raedle | Bloomberg | Getty Images

Household debt rose to more than $16 trillion for the first time in the second quarter, as rising inflation pushed home and car balances up, the New York Federal Reserve reported Tuesday.

U.S. corporate IOUs stood at $16.15 trillion through the end of June, up $312 billion — or 2% — from the previous quarter. Debt gains were widespread, but focused mainly on mortgages and car purchases.

“Americans are borrowing more, but much of the increased borrowing is due to higher prices,” the New York Fed said in a blog post on its release.

Mortgage balances were up 1.9% for the quarter, or $207 billion, to about $11.4 trillion, although the pace of production was slower. That annual increase represented a 9.1% increase from a year ago, when house prices exploded during the pandemic era.

Credit card balances rose $46 billion over the three-month period and 13% over the past year, which was the largest gain in more than 20 years, according to Fed researchers. Non-residential deposits are up 2.4% from the first quarter, the largest increase since 2016.

Student loan debt had changed little at $1.59 trillion.

The loan growth is accompanied by an 8.6% year-on-year inflation in the second quarter, including a 9.1% increase in June — the biggest step since November 1981 — according to the Bureau of Labor Statistics. Shelter inflation rose 5.5% year-on-year in June and new and used vehicle prices rose 11.4% and 7.1% respectively.

In response to high inflation, the Fed has raised interest rates four times in 2022, by a total of 2.25 percentage points. Those moves, in turn, pushed the 30-year mortgage rate to 5.41%, more than 2 percentage points more than at the start of the year, according to Freddie Mac.

Despite rising debt and inflation levels and higher interest rates, the default rate remained relatively favourable.

“While debt balances are growing rapidly, households in general have weathered the pandemic remarkably well, thanks in no small part to the extensive programs put in place to support them,” the Fed blog post reads. “In addition, household debt is predominantly held by higher-rated borrowers, even more now than in the history of our data.”

Through June, about 2.7% of outstanding debt was past due, nearly 2 percentage points lower than in the first quarter of 2020 as the country entered the Covid pandemic.

Fed economists noted that default rates were getting higher for subprime borrowers at the lower end of the credit scale.

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