Riding the Credit Wave: Q2 2023 Sees $17.06 Trillion Household Debt Crest

The recently released Q2 2023 Household Debt and Credit Report from the Federal Reserve Bank of New York reveals telling insights into the current state of consumer debt and borrowing behaviors in America. The comprehensive quarterly report analyzes trends across mortgages, credit cards, auto loans, and student loans to gauge household debt developments and their implications on financial well-being and the broader economy.

As of June 30, 2022, total household debt balances edged up to $17.06 trillion, a $16 billion increase from Q1 2022. While seemingly a small uptick, this marks a noteworthy shift from the steep declines witnessed during the early phases of the pandemic. The minuscule rise indicates consumer debt is stabilizing yet remains somewhat restrained, suggesting households may be taking a cautious stance amidst rising inflation and economic uncertainties.

Digging deeper into the $17.06 trillion total uncovers variances among debt types, with some rapidly ascending while others contract. Credit cards and auto loans saw significant growth, student loans declined, and mortgages remained largely flat. Delving into each category reveals crucial consumer behaviors and motivators that provide context around the numbers.

Household Debt and Credit Developments as of Q2 2023 

CATEGORY	QUARTERLY CHANGE * (BILLIONS $)	ANNUAL CHANGE** (BILLIONS $)	TOTAL AS OF Q2 2023 (TRILLIONS $)
Mortgage Debt	(-) $30	(+) $627	$12.01
Home Equity Line Of Credit	(+) $1	(+) $21	$0.34
Student Debt	(-) $35	(-) $20	$1.57
Auto Debt	(+) $20	(+) $80	$1.58
Credit Card Debt	(+) $45	(+) $144	$1.03
Other	(+) $15	(+) $57	$0.53
Total Debt	(+) $16	(+) $909	$17.06

*Change from Q1 2023 to Q2 2023 
** Change from Q2 2022 to Q2 2023

Surge in Credit Card Balances Reflects Spending Resurgence

Of all debt types tracked in the Q2 report, credit cards witnessed the most pronounced change. Balances spiked by $45 billion to $1.03 trillion, a 4.5% increase from Q1 2022. This propels credit card debt to an unprecedented level, surpassing $1 trillion for the first time ever.

The abrupt rise in credit card balances indicates consumers are ramping up their credit card spending and borrowing. The reasons behind this resurgence are multifaceted. For one, as pandemic restrictions ease, services reopen, and travel resumes, consumers may be returning to pre-covid spending behaviors. Pent-up demand is being unleashed as households begin dining out, planning vacations, attending concerts, and partaking in experiences limited during quarantine periods. With over two years of constrained discretionary spending, many households likely have a greater appetite and budget for entertainment, hospitality, and travel that is partially being funded through credit card financing.

Furthermore, the red-hot inflation squeezing household budgets is likely also contributing to greater credit card reliance. As food, gas, and housing costs gallop ahead, consumers may be relying on credit cards to help bridge budget shortfalls. Supply chain turmoil and inventory issues are also prompting some households to overutilize credit cards to secure essentials or lock in purchases for future needs.

TheFed also points to possible growth in convenience user borrowing behaviors, where financially stable households take on credit card debt despite having funds available. This cohort opts to pay down balances over time rather than fully upfront. While this convenience borrowing does not necessarily indicate financial strain, it does prop up overall credit card debt levels.

Higher balances can also be attributed to consumers gradually returning to more typical spending and payment levels as pandemic assistance and loan repayment pauses expire. The cessation of financial cushions like enhanced unemployment benefits, child tax credits, and paused student loan payments may have necessitated increased card usage to uphold existing lifestyle spending.

Diminished Mortgage Originations Keep Debt Flat

In contrast to the sharp upswing in credit card balances, mortgage debt in Q2 remained largely stagnant, inching up only $2 billion to $12.01 trillion. This marks a significant shift from the steady mortgage debt expansion witnessed for most of the pandemic period.

The muted mortgage debt growth is tied closely to slowing originations. As per the Mortgage Bankers Association, mortgage loan originations sank to $445 billion in Q1 2022, plummeting over 50% from the Q1 2021 highs. Following a two-year home-buying bonanza spurred by low rates and remote work arrangements, mortgage lending began slowing as rates started climbing.

The Fed’s rate hikes are a key factor in damping mortgage originations, given higher interest rates deter would-be homebuyers and refinancers. Rates on 30-year fixed mortgages topped 5% in Q2 for the first time since 2018, more than doubling from under 3% during pandemic lows.

Beyond rising rates, inflated home prices are also undercutting affordability and slowing purchase demand. The median existing-home sales price hit $407,600 in June 2022, spiking nearly 14% from June 2021 according to the National Association of Realtors. With home price growth outpacing wage gains, purchasing power has weakened, evidenced by declining home sales.

Relaxed lending standards during the early pandemic have also begun tightening, posing hurdles for marginal buyers. As the white-hot housing market cools, lenders are exercising greater caution. Added scrutiny around debt-to-income ratios, credit scores, and down payment requirements restricts borrowing capacity, particularly for first-time buyers.

These collective trends explain the tempering in mortgage origination and stagnancy in overall mortgage debt despite still elevated property values. How long this sluggishness persists hinges on the direction of rates and housing affordability going forward.

Auto Loans Up as New Car Prices Soar

Automotive debt expanded more rapidly than mortgages, rising by $20 billion in Q2 2022 to $1.50 trillion. The ascent continues the steady trajectory in auto loan balances observed since 2011.

Surging vehicle prices appear the dominant factor propelling the auto debt increase. According to Kelley Blue Book, the average new car transaction price for June 2022 exceeded $48,000. This reflects a nearly 14% jump from June 2021, far outpacing broader inflation.

Pandemic-induced inventory shortages, supply chain dysfunction, and scarcity of popular models like SUVs and trucks have enabled automakers to dial back discounts and incentive offers. With consumers willing to shell out more for new wheels, the higher car prices get baked into loan values. Lenders are also stretching loan terms to maintain monthly payments despite pricier rides, thereby increasing overall debt burdens.

Data from credit bureau Equifax reveals the average loan amount for new car purchases in Q1 2022 eclipsed $40,000, soaring over 25% from pre-pandemic levels. Loans for used cars also swelled to around $28,000. This shows consumers across both new and used markets are taking on elevated auto debt, likely to finance more expensive vehicles.

Besides inflated car values, consumer preferences are steering towards premium models that inherently carry higher loan amounts. Trucks and SUVs remain sought after, commanding high price tags. And EVs like Teslas, despite environmental cachet, are mostly purchased by higher-income households able to swallow luxury price points. These dynamics expand the share of auto loans at upper dollar bands.

The Fed data does indicate new auto loan originations slowed in Q2 amidst inventory shortfalls. But originations were likely skewed towards luxury makes, allowing balances to keep rising. With no near-term resolution to the chip shortage, vehicle scarcities will persist, sustaining elevated auto debt levels.

Student Loan Balances Decline on Repayment Pause

In contrast to steady climbs in credit card and auto debt, student loan balances retreated in Q2 2022, shrinking $35 billion to $1.57 trillion. The drawdown underscores the substantial impact of temporary federal student loan repayment pauses instituted during the pandemic.

The payment freeze has prevented any new delinquencies, allowing balances to incrementally diminish as borrowers continue making intermittent voluntary payments. Absent accruing interest also curbs balance growth. The collective relief has eased repayment pressures, providing critical support that manifests in declining balances.

However, payment pauses are set to terminate on August 31, 2022. Once the freeze lifts, balances are poised to resume growing as interest capitalization restarts along with mandatory payments for millions. The impending resumption of payments for over 40 million borrowers has spurred intense debate around broader student debt cancellation.

Nonetheless, the present balance declines reflect a temporary respite. How balances trend long-term will be determined by any potential future cancellation measures or permanent repayment changes. Absent such reforms, balances will reconverge to pre-pause growth trajectories once mandatory payments and interest accumulation recommence.

Delinquencies Normalize but New Troubled Debt Emerges

Alongside total balance changes, delinquency rates reveal how well households are managing debt obligations. The New York Fed data demonstrates delinquencies remain low across categories, but new trouble spots are materializing.

As of Q2 2022, 4.81% of outstanding debt was delinquent or in default versus 4.78% in Q1. This keeps delinquencies well below pre-pandemic levels but indicates a bottoming out of pandemic-era improvements. The unevenness across debt types is noteworthy.

Credit cards showed the most pronounced worsening in delinquencies, with 90+ day delinquency rates rising to 2.62% after falling below 2% during the pandemic. Auto loans also experienced an uptick in delinquencies to 2.71%. The increases likely reflect consumers taking longer to pay down pandemic debt accruals.

In contrast, mortgage and student loan delinquency rates were largely unchanged, aided by market conditions or policy interventions. Mortgages showed a minor improvement to 2.78% delinquency, helped by the home price appreciation. Student loans remained static at 4.81% delinquency due to ongoing payment pauses.

These patterns of stabilizing or slightly worsening delinquencies among categories indicate consumer financial conditions are normalizing post-pandemic. Households no longer benefit from expanded government assistance, loan forbearance, or reprieve from expenses like travel and commuting. Looser lending from early pandemic stimulus is giving way to prudent post-covid standards.

While overall delinquency rates remain well below pre-pandemic levels, newly troubled debt is inching upwards in areas like credit cards and auto loans. This bears monitoring as households contend with inflation and recession worries. However, strong job markets may buttress the ability to service debts.

Economic Implications: Cautious Consumerism in Challenging Times

The Q2 2022 household debt findings reveal a nuanced picture of consumer financial behaviors shaped by an unusual economic backdrop. The data indicates households are treading cautiously amidst competing dynamics of continuing pandemic recovery, white-hot inflation, rising rates, and mounting recession concerns.

Key takeaways suggest consumers are judiciously tapping credit cards to fund likely pent-up spending demands while throttling back debt accumulation in categories like mortgages and student loans. Delinquency normalization also implies households have crossed a post-pandemic bridge but remain fundamentally resilient enough to service debts.

Notably, the debt growth concentrated in credit cards and auto loans is primarily occurring within higher-income households. This indicates a bifurcation where the financially stable tap debt to fund upgraded lifestyles, while lower-income groups are more debt-constrained by inflation.

Looking ahead, the interplay between household debt, consumer spending, and saving behaviors will significantly impact broader economic trajectories. If inflation persists and consumers further draw down savings to sustain spending, this risks over-leveraging household balance sheets. But if spending is reined in to replenish savings and pay off debts, this could curb economic momentum.

Debt-fueled consumption may create an artificially robust picture that belies household vulnerabilities. But debt avoidance could conversely dampen demand and growth. Finding the right balance will be key for both households and policymakers in charting an optimal path through challenging economic crosscurrents.