Consumer Debt Surpasses $17 Trillion Despite Decline in Mortgage Demand

Consumer debt

Total consumer debt in the United States reached a record high in the first quarter of 2023, surpassing $17 trillion, even as the demand for mortgages experienced a significant decline. According to the New York Federal Reserve, total borrowing across all categories increased by nearly $150 billion or 0.9% from January to March, pushing the overall indebtedness up by approximately $2.9 trillion since the pre-Covid period of 2019.

Interestingly, this surge in consumer debt occurred despite a notable decrease in new mortgage originations, including refinancings. The total volume of new home loans amounted to just $323.5 billion, marking the lowest level since the second quarter of 2014. This figure was 35% lower than the previous quarter and 62% below the same period last year.

The decline in mortgage demand can be attributed to rising interest rates. In the second quarter of 2021, new home loans reached a peak of $1.22 trillion when 30-year mortgage rates were around 2.65% due to a series of rate cuts by the Federal Reserve. However, the central bank has since implemented 10 rate increases, resulting in a current average rate of approximately 6.4%. As a result, total mortgage debt increased slightly to $12.04 trillion, up 0.1 percentage point from the previous quarter.

The impact of the recent mortgage refinancing boom, driven by lower interest rates, will have long-lasting effects on the economy. During the pandemic period starting in March 2020, around 14 million mortgages were refinanced, with 64% considered “rate refinances” where homeowners sought to take advantage of reduced borrowing costs. On average, these borrowers saved approximately $220 per month, leading to additional funds available for spending or debt repayment in other categories.

Despite the rise in interest rates, mortgage foreclosures remained low. However, delinquency rates increased across all debt categories. Credit card delinquency rates rose by 0.6 percentage point to 6.5%, auto loan delinquencies increased by 0.2 percentage point to 6.9%, and the overall delinquency rate climbed by 0.2 percentage point to 3%, the highest level since the third quarter of 2020.

Student loan debt also experienced a slight uptick, reaching $1.6 trillion, while auto loan debt nudged up to $1.56 trillion.

In summary, the first quarter of 2023 witnessed a significant milestone as consumer debt surpassed $17 trillion, highlighting a continuous trend of increasing indebtedness. Although the demand for mortgages, including refinancings, declined due to rising interest rates, the impact of the recent refinancing boom will continue to shape the economy for years to come. Despite some delinquency rate increases, overall mortgage foreclosures remained low. Monitoring consumer debt levels and delinquency rates will be crucial in understanding the financial health of individuals and the broader economy.