Household debt tops $16 trillion as inflation rises and rates rise

Household debt topped $16 trillion in the second quarter for the first time as soaring inflation pushed up housing and auto balances, the New York Federal Reserve reported Tuesday.

Collective U.S. IOUs totaled $16.15 trillion through the end of June, an increase of $312 billion – or 2% – from the previous quarter. Gains on debt were widespread, but particularly concentrated on mortgages and vehicle purchases.

“Americans are borrowing more, but much of the increase in borrowing is attributable to rising prices,” the New York Fed said in a blog post accompanying the release.

Mortgage balances rose 1.9% for the quarter, or $207 billion, to about $11.4 trillion, although the pace of originations slowed. The annual increase marked a 9.1% gain from a year ago as home prices soared during the pandemic.

Credit card balances jumped $46 billion in the three-month period and 13% in the past year, which Fed researchers said was the largest gain in addition 20 years old. Non-housing credit balances rose 2.4% from the first quarter, the biggest increase since 2016.

Student loan debt was little changed at $1.59 trillion.

The increase in borrowing is accompanied by inflation at an annual rate of 8.6% in the second quarter, which included a 9.1% increase in June – the largest development since November 1981 – according to the Bureau of Labor Statistics. Housing inflation rose at an annual rate of 5.5% in June and prices for new and used vehicles rose 11.4% and 7.1% respectively.

In response to high levels of inflation, the Fed raised interest rates four times in 2022, the increases totaling 2.25 percentage points. Those moves in turn pushed 30-year mortgage rates to 5.41%, up more than 2 percentage points since the start of the year, according to Freddie Mac.

Despite rising debt and inflation levels and rising interest rates, delinquency rates have remained relatively benign.

“Although debt balances are growing rapidly, households in general have weathered the pandemic remarkably well, thanks in large part to the extensive programs put in place to support them,” the Fed blog says. “Furthermore, household debt is overwhelmingly held by high-score borrowers, even more so now than it has been in the history of our data.”

Until June, some 2.7% of outstanding debt was in arrears, almost 2 percentage points less than in the first quarter of 2020, as the country entered the Covid pandemic.

Fed economists noted that delinquency rates were rising for subprime borrowers at the low end of the credit ladder.