Household debt tops $16 trillion for the first time, fueled by higher inflation and interest rates

Household debt climbed past $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.

The collective American IOU totaled $16.15 trillion through the end of June, good for a $312 billion — or 2% — increase from the previous quarter. Debt gains were widespread but particularly focused on mortgages and vehicle purchases.

“Americans are borrowing more, but a big part of the increased borrowing is attributable to higher 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, even though the pace of originations moved lower. That annual increase marked a 9.1% gain from a year ago as home prices exploded during the pandemic era.

Credit card balances surged $46 billion in the three-month period and 13% over the past year, which Fed researchers said was the largest gain in more than 20 years. Non-housing credit balances increased 2.4% from the first quarter, the biggest gain since 2016.

Student loan debt was little changed at $1.59 trillion.

The increase in borrowing comes with inflation running at an 8.6% annual rate in the second quarter that included a 9.1% increase in June — the biggest move since November 1981 — according to the Bureau of Labor Statistics. Shelter inflation rose at a 5.5% annual rate in June and new and used vehicle prices were up 11.4% and 7.1% respectively.

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

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

“Although debt balances are growing rapidly, households in general have weathered the pandemic remarkably well, due in no small part to the expansive programs put in place to support them,” the Fed blog post said. “Further, household debt is held overwhelmingly by higher-score borrowers, even more so now than it has been in the history of our data.”

Through June, some 2.7% of outstanding debt was in delinquency, nearly 2 percentage points lower than the first quarter of 2020 as the nation was entering the Covid pandemic.

Fed economists noted that delinquency rates were nudging higher for subprime borrowers at the lower end of the credit scale.