Trouble is Brewing on the Personal Debt Front

Delinquencies are rising for mortgage loans, auto loans and credit card loans. That's not good for the economy.

As personal savings generated from pandemic-assistance programs start to fade, our personal balance sheets are deteriorating.

Household debt jumped 8.5%, or $394 billion, in 2022 to $16.9 trillion, according to Federal Reserve data cited by Moody’s Investors Service. The debt has climbed a hefty $2.75 trillion, or 19% since the fourth quarter of 2019, prior to the covid pandemic.

Residential mortgages accounted for 86%, or $2.37 trillion, of that three-year increase. Low interest rates prior to the Federal Reserve’s rate-hike campaign that began in March 2022 sparked the mortgage increase, according to Moody’s.

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In recent quarters, debt has shifted strongly to credit cards, the firm noted. Credit card balances grew at multi-decade highs, soaring 15.2% in 2022.

“We expect credit card loan demand to stay strong in coming quarters,” Moody’s said. That will happen “as high inflation continues to drive a rapid rise in nominal spending and reduces some households' disposable income.” The decline of excess savings also will play a role, it said.

Subdued Growth for Auto, Mortgage Loans

To be sure, “demand for auto loans and mortgages will remain materially tempered by the increase in interest rates and elevated home prices,” Moody’s said.

Meanwhile, we’re starting to have trouble paying back our loans. The rate of new household debt delinquencies increased 17 basis points to 2.82% of total loans in the fourth quarter from the third quarter and 79 basis points from a year ago

But we’re still in better shape than the fourth quarter of 2019, when the delinquency rate was 4.67%. Clearly government assistance during the pandemic helped improve our balance sheets.

Still, the rate of increase for delinquencies has accelerated, particularly for credit cards and auto loans, Moody’s explains.

Delinquency Details

New credit card delinquencies totaled 5.87% in the fourth quarter, up 63 basis points from the third quarter.

On the automobile front, new auto loan delinquencies registered 6.64% in the fourth quarter, up 43 basis points from the third quarter. The rate is now just 27 basis points below the 2019 level of 6.91%.

As for mortgages, delinquency rates remain low: 2.25% in the fourth quarter, up from 1.57% a year earlier. Banks have been more cautious about granting mortgage loans since the housing crisis of 2007-10.

Bottom line: “the data support our expectation of a mild recession, and delinquencies are likely to continue rising,” Moody’s said.

“Assuming unemployment peaks at around 5%, we project that the rate of new credit card and auto delinquencies will likely peak in 2024 between 9% to 10% versus the 2019 rate of around 7%.” Unemployment hit a 53-year low of 3.4% in January.

Also, “we expect residential mortgage delinquencies to continue rising, though they are unlikely to reach 2019 levels until 2024,” Moody’s said.

So when it comes to our personal indebtedness, things aren’t looking so hot.