Americans’ Record Levels of Debt: Arguably Deadlier Than COVID-19
The US housing market experienced a boom in the last quarter, thanks to low interest rates. This boom fueled a new mortgage debt record of nearly $10 trillion, according to a recent press release by the Federal Reserve Bank of New York.
Climbing Mortgage Loan Debt
At the beginning of November, interest rates fell to a record low — the 12th record low in 2020, spurring many Americans to buy homes.
In the last quarter, total household debt increased by $87 billion, reaching a total of $14.35 trillion. This increase more than offset the decline in the second quarter of 2020. Mortgage balances, which make up the largest share of household debt, increased by $85 billion and reached a total of $9.86 trillion on September 30.
According to the press release, “Mortgage originations, which include refinances, were at $1.05 trillion, the second highest volume in the history of the series and second only to the historic refinance boom in 2003Q3.” However, balances on home equity lines of credit decreased by $13 billion — the 15th consecutive decrease since 2016Q4 — bringing the debt total down to $362 billion.
Though mortgage debt is at an all-time high, it’s worth noting that the share of borrowers with credit scores above 760 points is also much higher than previous quarters. Borrowers enrolled in forbearance programs, leading to only 0.6% of current mortgage balances becoming delinquent in 2020Q3.
Credit Card Debt
Credit card debt decreased by just $10 billion, compared to the $76 billion decline in 2020Q2 — the sharpest decline in recorded history (since 1999). This decline reveals the damaging effects of the COVID-19 pandemic on consumer spending.
Auto and Student Loan Debt
Auto loan debt increased by $17 billion, reaching $1.36 trillion — also a new record. Loan delinquencies decreased in the third quarter, thanks to programs created by the CARES Act which allowed for the deferral of payments as well as deferrals voluntarily offered by lenders.
Student loan debt increased by $9 billion but delinquencies declined to 4.4% in the third quarter, down from 9.3% in the previous quarter. However, government forbearance programs are due to sunset at the end of the year, leaving many borrowers with looming payment deadlines.
Between July and September, only 132,000 consumers had a bankruptcy notation on their credit reports — another historical low.
Total non-housing debt (which includes credit card, auto loan, student loan and other debt) increased by $15 billion.
The economic uncertainty created by the COVID-19 pandemic forced the federal government to radically increase spending. The total breakdown of costs is as follows:
- FY 2020, US Government Spending: $6.5 trillion
- FY 2020 Deficit: $3.1 trillion
- Stimulus Spending: $2.6 trillion
- Stimulus Tax Relief: $900 billion
- Next Stimulus Proposal: $1.8 trillion to $2.2 trillion
In January of this year, the Congressional Budget Office (CBO) estimated that the federal debt wouldn’t reach 98% of GDP until 2030. But in September, the CBO revised its projections, saying the federal debt will reach approximately the size of an entire economy this year and become larger than the gross domestic product by next year.
Michael Peterson, head of the Peter G. Peterson Foundation said, “We thought we had a full 10 years before reaching this unfortunate milestone, but the virus wiped out a decade of fiscal space in just a few months.” He goes on to say, “Worse yet, by 2023 we will break the all-time record for debt-to-GDP, which was set just after World War II.”
Arguably more dangerous than the pandemic, is the astronomical debt straddling the US economy. It remains to be seen how increasing federal and consumer debt will impact the future of consumer spending and the housing market.
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