Delinquencies remain subdued

February 6, 2024

Household debt rose by 1.2% to a total of $17.5 trillion in the fourth quarter 2023 according to the Federal Reserve Bank of New York’s Household Debt and Credit report. Over half of the increase was in mortgage balances at $112 billion, with non-mortgage balances rising $89 billion. The report indicates that delinquencies (of any duration) rose to 3.1% of total balances from 3.0% in the third quarter. That is above where we started the year at 2.6% but still well below the 2010s average of 6.7% and where households were just prior to the pandemic at 4.7%. The bulk of the increase in stress continues to be among high-risk borrowers and younger borrowers.

Mortgages increased by $112 billion during the fourth quarter, about the same pace as the third quarter. Mortgage originations continued at a subdued pace with most of the originations in households with higher credit scores, similar to the second and third quarters. Mortgage rates hit a peak last year in the last week of October, with the average for that week for a 30-year fixed rate mortgage reaching 7.8%. That fell steadily through December with housing activity picking up near the end of the quarter. Activity in home equity revolving lines of credit (HELOCs) unsurprisingly remained subdued given the higher rates.

While mortgage and HELOC defaults (over 90 days without making payment) remained extremely low, it is worth noting that delinquencies (over 30 days without making a payment) have risen. Mortgages remain below their pre-pandemic levels but are rising, while HELOCs have now met their 2019 levels.

The end of the year saw a pivot in consumer behavior toward using credit cards for purchases, which were paid down earlier in the recovery. In December, the personal saving rate fell to 3.7% from 4.1% in November. Credit card balances increased $50 billion in the fourth quarter. This data is not seasonally adjusted; it is normal to see substantial increases in credit card balances in the fourth quarter as consumers makes purchases for the holidays. However, unpaid balances are compounding much more rapidly now given the surge in credit card rates. Those transitioning into credit card defaults are now well above where they were in 2019 at 6.5% (vs 5.3% in the fourth quarter of 2019). Delinquencies for credit cards are now at their highest rates since 2011 at 8.5% of balances. Those increases were across all borrowers but were highest among younger borrowers. Delinquencies have been rising more rapidly for Millennials and Gen Z.

Auto loan balances increased by $12 billion. Autos are another area beyond credit cards where we have seen signs of stress. Higher rates have translated to much higher costs for consumers for new and used cars. As many as 7.7% of auto loans transitioned into delinquency in the fourth quarter compared to 6.9% in 2019, while 2.7% transitioned into default (higher than the 2.4% in 2019). The New York Fed’s Liberty Street Economics blog dug into the auto loan delinquencies to accompany the report. Staff found that car prices in addition to rates have been stressing household budgets. Autos and credit cards have shown most of the stress so far, with younger generations transitioning into delinquency faster. Baby Boomers, too, now have surpassed their pre-pandemic delinquency rates for autos. Delinquencies have risen the fastest in zip codes associated with lower income borrowers.

Student loan balances were essentially flat during the quarter after forbearance ended in October 2023. There was also no change to delinquencies or defaults which remain extremely low; we will not see the full impact of the end of forbearance until October of this year after the end of the pause on penalties for defaults. The new income-driven repayment plan and some forgiveness already put into effect have also supported borrowers with the resumption of loan payments. Data from the Treasury department on deposits from the Department of Education indicate borrowers are indeed paying back their loans. It is striking that student loans did not have a larger impact in the fourth quarter.