Wealth of geeks
According to the Federal Reserve Bank of New York, total US household debt increased by US$16 billion to reach US$17.06 trillion in the second quarter of 2023. Credit card balances, consumer credit and auto loans are at record levels, raising concerns among economists and financial analysts about the consumer-centric US economy.
Credit card balances hit record high
Credit card balances saw the sharpest performance deterioration among the debt categories this quarter, hitting a milestone of $1.03 trillion. This is the first time credit card balances have nominally exceeded $1 trillion.
“Credit card balances saw strong growth in the second quarter” said Joelle Scally, regional economic principal at the New York Fed.
Credit card balances have increased for seven consecutive quarters of year-over-year growth, and the second quarter of 2023 saw a 16.2% year-over-year increase, adding to this trend.
Borrowers with excellent credit scores, especially those above 760, had a higher chance of approval than subprime borrowers in the first half of 2023. This tightening trend is consistent with the results of the June 2023 SCE Credit Access Survey, which found an increase in refusal rates for credit applications, particularly among those with lower credit ratings. The overall rate of loan application denials rose to 21.8% and was highest among those with a credit score below 680.
car loan
payment defaults
accelerating
Auto loan portfolios rose $20 billion to $1.58 trillion, continuing the upward trend seen since 2011. The volume of new auto loans, which include leases, reached $179 billion, largely due to the high dollar value of the loans.
Car prices were a major factor behind the initial rise in inflation rates. At the end of 2019, the average loan for a new car was about $17,000, but that amount has skyrocketed due to the pandemic, peaking at nearly $24,000 in the fourth quarter of 2022.
In June 2023, the auto loan refusal rate rose to 14.2%, marking a new high as the percentage of auto loan debt defaulted increased by 0.4%.
real estate debt
A glimpse of hope
Despite the nationwide lifting of foreclosure moratoria, the number of new foreclosures remained low. About 34,000 people recently received foreclosure notices on their credit reports.
A major cause is the pandemic refinancing boom, reports the Federal Reserve Bank of New York. Homeowners who took advantage of historically low interest rates through refinancing in 2020 and 2021 can benefit from affordable financing costs for many years to come.
These borrowers, known as “interest refinancing” Borrowers have been successful in reducing their monthly mortgage payments, thereby improving their cash flow. Also, “Pay off” Borrowers have leveraged the equity of their real estate assets, giving them access to additional cash for consumption.
Approximately 5 million borrowers have accessed $430 billion in home equity through cash-out refinancing. At the same time, about 9 million people refinanced their loans without raising equity, reducing their overall housing costs by $24 billion a year.
Young Americans are under increasing financial stress
For both credit cards and auto loans, the proportion of new debt defaulting has increased. There is evidence that higher prices and interest rates are the main factors behind this increase in arrears. Default rates are higher for younger borrowers than for older borrowers.
The Federal Reserve’s continued efforts to contain inflation – which hit a 40-year high in 2022 – pushed interest rates to unprecedented levels. In July, the central bank raised interest rates for the 11th time since March 2022. That quarter-point hike brought interest rates to a target range of 5.25% to 5.50% — the highest level in 22 years. Consequently, these increases in the Federal Funds Rate had a cascading effect on Annual Percentage Rate (`R), auto loans and credit card mortgages.
This is especially problematic for younger borrowers, who are more likely to still have federal student loans in administrative forbearance. Outstanding student loan debt was $1.595 trillion at the end of 2022. Federal student loan payments will remain suspended until October 2023.
Some of these borrowers are struggling to pay their credit card and auto loan fees even though they are not currently required to pay back their student loans. When payments on those loans resume later this year, millions of younger borrowers will face additional monthly expenses, potentially fueling a further increase in default rates.
Americans are experiencing rising prices in a variety of areas, including credit card purchases, grocery spending, fuel costs, and other commodities. It is plausible that rising prices and the resulting debt service payments are negatively impacting borrowers’ financial health and making it more difficult to meet their financial obligations, especially given the decline in real disposable income in 2022.
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