US household debt edges up, delinquency rates stabilise

According to a report from the Federal Reserve Bank of New York on Tuesday, US household debt ticked higher in the second quarter of 2024, but the overall delinquency rates were steady.

The total debt increased by $109 billion, 0.6 per cent to $17.80 trillion. This is an increase of $3.7 trillion from pre-pandemic levels at the end of 2019.

The report comes at a time when uncertainty rocks the economy.

A decision by the Federal Reserve to increase its benchmark interest rate from 5.25 to 5.50 per cent between March 2022 and July 2023 brought about increased borrowing costs as it looked to combat inflation.

The economy has held up quite well, partly thanks to a high savings rate, but some recent jobs data has stoked fears of a possible economic downturn.

Fed policymakers, who have indicated plans to cut rates starting in September now that inflation is nearing the 2 per cent target, are closely watching indicators of financial stress, including delinquency rates.

The report was reassuring, overall, in showing delinquency rates steady at 3.2 per cent, matching the first quarter and well below the 4.7 per cent rate seen at the end of 2019.

Modest increases in credit card and auto loan delinquency transition rates occurred despite this stability.

Regarding credit cards, approximately 9.1 per cent of their balances transitioned to delinquency, as did 8.0 per cent of the outstanding auto loan balances over the past year.

There was also a small rise in mortgage delinquencies; however, the rates of early delinquency for mortgages remain low compared to their historical levels.

Mortgage balances surged by $77 billion to $12.52 trillion during the quarter.

Auto loan levels were up $10 billion, and credit card borrowing advanced by $27 billion to $1.14 trillion.

Credit card balances were up 5.8 per cent from the previous year. Retail card balances and other consumer loans remained relatively flat, while student loan balances fell $10 billion.

HELOCs advanced from $4 billion to $380 billion for the ninth consecutive quarter.

This is $63 billion higher than Q3 2021, as HELOCs have remained more attractive than cash-out refinancings or new mortgages in a high-interest rate environment.

Of the 1.8 million HELOCs that originated in 2023, about 57 per cent went to borrowers aged 50 and older, with another 24 per cent secured by those in their 40s.

It is said that HELOCs are generally issued only to those with a good credit score.

New mortgage originations remained flat at $374 billion in the second quarter, consistent with the prior four quarters.

This level was way below the peaks reached from Q2 2020 to Q4 2021, a period characterised by very low borrowing costs that had driven a strong housing market.