The New York Fed's Q2 2024 report released last month revealed U.S. household debt has surged to $17.76 trillion, highlighting the growing financial strain on consumers. Mortgage debt continues to dominate the landscape, accounting for 70% of the total debt. However, while mortgages represent the largest portion, credit card and auto loan delinquency rates have emerged as a growing concern. With higher interest rates and the rise in buy-now, pay later platforms, consumers are finding it harder to manage this type of debt, becoming more vulnerable to delinquency.
The Federal Reserve recently cut the key federal funds rate by 50 bps to ~4.8%, with more cuts expected into 2025. This was an attempt to stimulate the softening labor market as inflation levels stabilize near their 2% target, driven by slower rental growth and lower commodity prices. However, despite this effort to jumpstart the economy, rising debt levels continue to remain a top concern for both consumers and financial institutions. With savings rates at nearly an all-time low (2.9% of disposable personal income) and an economy primarily driven by consumer spending (68% of GDP), the fragility and dependability of the consumer financial landscape is concerning.
Delinquency rates, especially for credit cards, have been rising over the past few years suggesting that higher living costs are making it difficult for consumers to keep up with their bills. This is an early indication that consumer are maxed out. While the inflation rate has slowed, prices are still rising and the money supply (M2) continues expanding.
Noteworthy, while delinquencies have increased, foreclosures still remain relatively low compared to historical standards. This distinction suggests that, for the time being, many households are managing to avoid the most severe financial consequences. With that said, the number of consumers with new bankruptcies are +33% since 2023, yet remain 1/4 of the 2008 Great Financial Crisis levels.
The historical geographic breakdown of delinquencies offers further insights into where financial stress might become more pronounced. States like Nevada and Florida are particularly affected, with Nevada seeing over 25% of debt balances becoming 30+ days delinquent following the GFC. This trend is especially concerning for states with high housing costs and economies that depend heavily on tourism, such as California and Florida. Despite the slow uptick since 2022, delinquency rates as a percentage of total balances remain much lower than during the GFC, indicating that consumers and lenders are better positioned to handle financial shocks.
Overall, the rising delinquency rates in credit card and auto loans serve as a cautious signal for the broader financial landscape. As consumers continue to take on more debt and struggle to manage high-interest, the risk of defaults may trickle down, impacting their ability to meet mortgage obligations. This underscores the importance of monitoring leading indicators of consumer financial health, as increased financial strain on households could ultimately lead to a deterioration of mortgage performance, threatening stability in the housing market.
Source: New York Fed Consumer Credit Panel/Equifax
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