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Debt increases, increasing risks for many households

Households are getting more and more into debt. Part of this debt creates particularly significant financial risks for households. They still have to repay this debt, even if they lose their jobs or encounter a health emergency, among other unforeseen events. As the pandemic rages and accelerates again, the risks of such emergencies also increase. They may also face significantly higher interest rates on their outstanding debt, and the Federal Reserve is poised to gradually raise interest rates. The combination of several financial risks that are increasing at the same time could be toxic for many households.

Household debt continues to increase. It increased by a non-inflationary amount $ 305.1 billion in the third quarter of 2021. These three months capped the 10e consecutive quarter in which household debt increased. Debt stood at 98.8% of after-tax income in September 2021. This is all the more remarkable as after-tax income grew rapidly during much of the pandemic due to stimulus checks and others. government aid. The pandemic has not put an end to Americans borrowing, even against a backdrop of faster income growth.

Most of the new debt is mortgages. As a proportion of after-tax credit, mortgages, including home equity lines of credit, stood at 63.2% in September 2021, rapidly approaching pre-pandemic levels. Mortgages not only grew faster than after-tax income, but also faster than real estate values ​​in the second and third quarters of 2021. These were the first two quarters of these home equity withdrawals since the third. quarter of 2007. Many households may have wanted to take advantage of low interest rates, while they still lasted. Real estate withdrawals may come to an end again, once the Federal Reserve slows down its mortgage-backed securities purchases in 2022.

Credit card debt also grew faster than after-tax income in the summer of 2021. It again topped $ 1,000 billion in September 2021 and stood at 5.5% of after-tax income, compared with 4.9% in March 2021. still well below the 6.6% of after-tax income recorded at the end of 2019, just before the outbreak of the pandemic.

Other consumer debt, primarily auto and student loans, rebounded even faster. Households owed $ 3.3 trillion in this debt in September 2021. This was equivalent to 18.4% of after-tax income, up from 16.5% in March 2021 and also quickly approaching the record high of 18.9%. at the end of 2019 (see figure below).

Many households do not have the necessary savings or the ability to borrow against their homes to finance a car purchase or education. People of color, for example, are more likely than white households to have such debt as a result. Yet, these loans carry higher interest rates than mortgages. Auto loans for a new car, financed over four years for example, amounted to 5.1% in the third quarter of 2021, when mortgage interest rates stood at 3.0% end of September. Debt is particularly heavy for households that are already in debt wealth of previous generations and face more obstacles to the creation of more wealth.

Household indebtedness does not stop at these formal forms of indebtedness. The pandemic has highlighted the financial interdependence between low-debt households and few options for accessing affordable debt in an emergency. They often borrow. US Census Bureau’s data Household pulse survey show that 17.5% of African Americans, 14.2% of people of multiple or other races, and 14.0% of Latinxes borrowed from friends or family members to pay for their living expenses in September 2021. In By comparison, only 6.7% of whites and 6.7% of Asian Americans relied on informal financial support at the time. Again, debt is more prevalent, where wealth is less widespread, and this debt is often costly and risky.

Debt is a ubiquitous and often necessary form of financing for many households. This comes with unique financial risks, such as the risk of losing an important source of income through unemployment while having to pay down that debt or significantly higher interest rates. These risks and costs of debt are unevenly distributed. And debt has increased in all its forms during the pandemic, leaving many households, especially households of color and low-income households in a financially precarious situation.

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