USA household debt has grown by $1 trillion in 2021, the most since 2007

USA home debt image source

According to a report released on Tuesday by the New York Federal Reserve, consumer debt in the United States increased by the most in 14 years in 2021 as residents increased borrowing to afford highly expensive homes, vehicles, and other commodities.

According to statistics from the Federal Reserve Bank of New York, household debt has increased by $1 trillion in 2021, the largest annual increase since 2007.

Household debt increased by $333 billion to $15.58 trillion in the fourth quarter, the highest quarterly rate of growth since 2007.

According to the research, which is based on data from the New York Fed's nationally representative Consumer Credit Panel, mortgage debt, and auto loans were the main drivers of the increase.

"The aggregate amounts of recently introduced mortgage and car loans rapidly jumped in 2021, matching to rises in housing and car prices," stated Wilbert Van Der Klaauw, senior vice president of the New York Fed.

The mortgage is increasing.

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According to the research, home loan originations, which were at record highs last year, increased mortgage debt by $258 billion in the fourth quarter to $10.93 trillion at the end of December.

As homeowners hurried to get ahead of a projected rate hike this year, these new loans were locked in at appealing interest rates. According to Fed researchers, this may have the unintended consequence of preventing homeowners from selling their homes in order to keep their low rates.

Although credit scores of individuals who took out new mortgages have fallen slightly since the beginning of the crisis, they remain high, with 67 percent of fourth-quarter mortgages given to borrowers with credit scores of 760 or more.

Delinquencies have not increased as mortgage forbearance protections end, according to the research. Even though the foreclosure ban was lifted over the summer, other federal and state measures, as well as robust home price growth, have prevented numerous foreclosure beginnings, according to the Fed researchers.

More ability to take on debt.

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Credit card balances also grew by $52 billion in the fourth quarter, indicating that consumers are returning to their pre-pandemic buying habits. Despite the fact that this was the highest quarterly increase in the data's history, credit card balances are still $71 billion lower than they were at the end of 2019.

Credit card use normally increases in the fourth quarter as consumers make holiday shopping, but researchers say the spike could also be due to increasing costs for products and services.

According to experts, households have been able to absorb the greater debt loads so far, and delinquencies have remained low, thanks in part to savings collected during the pandemic and forbearance programs.

"The economy is improving, salaries are rising, and people have the ability to take on more debt," said Tim Duy, chief economist at SGH Macro Advisors and a University of Oregon professor.

Duy also added the percentage of expendable income spent on rent, loan payments, taxes, and other obligations are low by historical standards.

Still, according to New York Fed experts, those borrowers who did not perform well during the epidemic may have a tougher time keeping up with their loan payments later.

They said it'll be interesting to see how certain debtors manage when they have to resume student loan debt payments in a few months.

Rising prices increase the amount owed on auto loans and credit cards.

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Car loan balances increased by $15 billion in the fourth quarter and $84 billion years over year. The Fed recorded $734 billion in new auto loans in 2021, the largest level ever, totaling $1.46 trillion in auto loan debt.

These dramatic increases are attributed, in part, to a historic increase in car prices into 2021. According to the survey, rising prices have an effect on all sorts of vehicle loan debtors. The only significant difference was that subprime borrowers funded 16% fewer autos in 2021 than they did in 2019.

The loans will result in increased payments for customers who purchased cars in 2021 at higher costs and required additional financing. The average loan balance increased by roughly 20%, while the median monthly payment on newly opened loans increased to $418 in 2021, an increase of 8% over 2020.

The fourth quarter had the greatest quarterly growth in the 22-year history of the data, with credit card balances raising $52 billion. Credit card balances, on the other hand, are down $71 billion from the end of 2019.

So if the increase in credit card debt was more than predicted, due to the winter holidays, a year-end increase is common. According to the Fed researchers, there were still some pandemic-related concerns about the supply of commodities for the holidays at the end of 2021, which may have induced some purchasing adjustments. They also speculated that overall price rises may have driven up spending for consumers who buy the same bundle of goods on a frequent basis.

A sign of light

In 2021, student loan debt fell by $8 billion. This comes after nearly two decades of steady growth.

Lower student enrollment and modifications in loan forgiveness procedures were two variables that led to this. According to Fed experts, despite the fact that loan payments were suspended during the pandemic, many people paid down their debts anyhow. While forbearance prevented balances from falling, interest stopped accruing as well, creating a canceling effect, according to the study.

Generally, the consumer picture in the home appears to be positive, according to the survey. However, when crisis protection programs, such as loan and mortgage forbearance, wind down and prices and interest rates continue to rise, a new debt burden and cash flow picture for households may develop, causing stress, according to the analysts.

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