Record Highs in Consumer Debt Despite Dwindling Mortgage Demand

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2023 has begun on an unsettling note as consumer debt in the United States marked a new record high, exceeding the staggering $17 trillion threshold in the first quarter. This increase occurred even as mortgage demand experienced a significant decline.

In the January-to-March period, the total borrowing across all categories escalated to $17.05 trillion, a nearly $150 billion, or 0.9% increase. This rise signifies an approximate $2.9 trillion surge in total indebtedness since the period preceding the Covid pandemic, which ended in 2019.

Contrarily, the new mortgage originations, including refinancings, in the same period totaled a mere $323.5 billion. This represents the lowest activity level in this sector since the second quarter of 2014, marking a 35% decrease from the fourth quarter of 2022 and a drastic 62% drop from the same period the year before.

The originations of new home loans reached their zenith in the second quarter of 2021 at $1.22 trillion. Since then, as interest rates began to climb, the demand for new home loans has been on a steady decline. This descent was fueled by a series of rate hikes implemented by the central bank to combat inflation, which in turn led to an increase in the 30-year mortgage rates to around 6.4%. These rising rates have nudged the total mortgage debt slightly higher to $12.04 trillion, a 0.1 percentage point growth from the previous quarter.

Prior to this, the historically low mortgage rates, around 2.65% in January 2021, had spurred a wave of both new home purchases and refinancings. According to data, approximately 14 million mortgages were refinanced since the onset of the pandemic in March 2020. Among these, a significant 64% were "rate refinances," or homeowners seeking to capitalize on the lower borrowing costs. The average savings for these borrowers approximated to around $220 per month.

The decrease in annual payments, a result of substantial equity drawdowns, offered homeowners an opportunity to reduce their overall debt burden or increase their spending capacity.

Despite the rising rates, mortgage foreclosures maintained a low profile. However, the same cannot be said for delinquency rates for all debt, which marked an increase. The delinquency rate for credit cards rose 0.6 percentage points to 6.5%, while auto loans experienced a 0.2 percentage point rise to 6.9%. The total delinquency rates saw a 0.2 percentage point uptick, reaching 3%, the highest since the third quarter of 2020.

Other categories of debt such as student loan and auto loans also saw an increase, with student loan debt reaching $1.6 trillion and auto loans slightly inching up to 1.56 trillion.

The first quarter of 2023 has been characterized by a marked contrast within the borrowing sector, where consumer debt has reached record levels amidst dwindling mortgage activity, painting an intricate picture of the U.S. economic landscape. As we move forward into the year, these trends will continue to shape economic strategies and policies.

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