Consumer Debt Soars, Unmasking Housing Market Risks

Consumer debt rose to a record $17.1 trillion during the second quarter of 2023, according to the latest data from the New York Fed— underscoring both the effect of rising interest rates and the resolve of post-pandemic consumer demand. However, beyond the headline is seemingly a silver lining for the housing market: mortgage debt declined over the same period. Between Q1 and Q2 2023, overall consumer debt rose by $16 billion, while mortgage debt alone fell by $30 billion. Still, while stable mortgage balances are helping the housing market avoid a 2007-style scenario, it also signals the burden of rising home-financing costs while masking the risk of mounting credit card debt.

Overall, mortgage debt is down as new originations slow, which, as older loans mature, results in a net negative in total volume. In terms of the Fed’s monetary policy goals, this is a welcomed development— a slowdown in homebuying demand is needed to tame inflation. After all, shelter costs accounted for 90% of the increase in the CPI in July. Still, falling debt levels are proof that homebuying demand has slowed as housing prices remain sticky and credit conditions tighten. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage is up 1.74 percentage points from one year ago[1] and continues to hover near 20-year highs — keeping many would-be homebuyers on the sideline.

While deleveraging in the housing market is a welcome development for economic stability, mounting credit card debt balances present a fresh cause for concern. According to the New York Fed’s report, credit card balances are up 4.6% quarter-over-quarter, rising by $45 billion to $1.03 trillion in Q2. Steady consumer spending levels are being amplified by inflation pressures, partially explaining the sharp increases. Still, in a worrying sign, the four-quarter average for credit card delinquencies rose to an 11-year high.

While economists at the New York Fed noted that today’s delinquency rates are roughly in-line with pre-pandemic levels, even as inflation slows, generationally high-interest costs mean that consumers, on average, will take longer to pay down their debts. The burden will likely also be more widespread. According to an analysis by Liberty Street Economics, there are roughly 70 million more credit card accounts open in 2023 compared to 2019, while roughly 69% of all Americans have at least one credit card— a substantial ten percentage points higher than a decade ago.

Widespread and indefinite debt financing may force would-be homebuyers to delay purchases further into the future or enter the market with less-favorable credit scores. Evidence of these constraints appears in the Federal Reserve’s Survey of Household Economics and Decision Making, where the share of adults reporting that they can pay their monthly bills in full fell by four (4) percentage points in 2022 — the largest single-year drop off since the survey’s 2016-inception.

Nevertheless, to date, there is little evidence of systemic financial stress — especially if recent consumer spending levels are any proof. However, the resumption of student loan payments this Fall will test consumer demand in ways unseen since the beginning of the pandemic, while tighter credit standards have rasied the bar for would-be borrowers. Will the housing market blink?

[1] Data is calculated based on the average rates from 08/11/22 and 08/10/23.