The latest report on overall household debt and credit by the Federal Reserve Bank of New York shows that U.S. households remain in decent financial health. But there are still major splits between Americans who own homes and large stock portfolios and lower-income segments of the population, according to the data, which was released on Tuesday, and recent reports from private banks.
The report from the New York Fed showed that mortgage debt balances rose by $257 billion from July to September, totaling $13.4 trillion. That’s a strikingly large amount of debt, but the vast majority of Americans are managing to service it.
The stabilizing power of the 30-year, fixed-rate mortgage continues to be the strongest anchor for households’ finances. After a surge in home buying during the pandemic, tens of millions of families are still benefiting from having locked in low-rate monthly payments. That has served as a meaningful buffer for consumers, even as overall inflation has eroded their purchasing power more broadly in recent years.
Another sign of underlying resilience can be found in home equity lines of credit, which are revolving loans backed by the value of the borrowers’ home. They tend to carry much lower interest rates than credit cards, and they allow borrowers to tap their wealth without selling their home. HELOC balances rose by $23 billion in the third quarter of the year, the 18th consecutive quarterly gain, and the largest increase since 2005.
Affluent and upper middle-class households in particular have been using HELOCs in recent years for home repairs and renovations, as well as for personal expenses. Unlike 2005, when the housing bubble was near its peak, Fed researchers note that this borrowing now seems to largely be stemming from strength — not stress. Serious delinquency for these lines of credit is exceptionally low, hovering around 1 percent.
Homeowners’ equity in real estate has soared to about $36 trillion as of September from around $18 trillion in 2019. Real estate wealth is unequally distributed in the United States, with the top 10 percent of households constituting a disproportionate share of household net worth.
The surge in HELOCs made sense in view of that data, the New York Fed researchers wrote, the calling these loans “a logical point for extracting that equity.”
Still, households that are current on their debt payments are not necessarily comfortable. Other Federal Reserve research in recent years has shown that about 40 percent of the population has “little to no disposable income” at the end of month, after taxes and basic expenses are met. Credit cards borrowers with lower incomes and credit scores are now showing higher levels of distress, according to the New York Fed, while higher-income consumers have generally avoided a deterioration in credit.
And this month, a team of researchers at Bank of America noted, using anonymized account data, that financial pressure is extending beyond lower-income households.
Lower-to-middle income renters are perennially stretched, but around one in four higher-income mortgage holders are also spending more than half their income on housing, according to the bank. Financial experts generally recommend that consumers should spend no more than 30 percent of their monthly income on housing costs.
With interest rates elevated, and prices much higher for new vehicles than just a few years ago, auto loan payments have become a point of stress for lower-income borrowers as well — even if many are still finding ways to budget and meet their monthly obligations.
In a bright spot, student loan debt delinquencies have moderated. When Biden-era federal aid for those deep in student loan debt was reversed last year, there were widespread fears among some analysts that a burst in defaults could occur. For now, though, it appears most borrowers have been able to stave off missed student-loan payments.