The Fed: Household balance sheets ‘remained strong’ and debt vulnerabilities are moderate, Fed survey finds


U.S. households balance sheets remained strong in the first half of this year as the debt-to GDP ratio edged down, a new study from the Federal Reserve said Friday.

Household debt was at modest levels relative to GDP and concentrated among prime-rated borrowers, the Fed said, in its latest report on the country’s financial stability.

Economists watch the health of U.S. households closely as consumer spending makes up roughly 70% of gross domestic product

The Fed said that, going forward, inflation and rising borrowing costs may pose risks to the ability of households to service their debt, especially for those holding adjustable-rate products.

An economic downturn or a correction in real estate prices would also put pressure on household balance sheets.

In the first six months of the year, the ratio of household debt to GDP inched down and stood at levels similar to those that existed before the buildup preceding the 2007-2009 financial crisis, the Fed said.

Balance sheets were strong despite a sharp decline in equity prices due to elevated levels of liquid assets and large home equity cushions.

Many households started to draw down the buffers of savings that had accumulated during the pandemic and some households remain financially stressed, the Fed said.

Borrowing for near-prime and subprime borrowers dropped over the period. One note of caution is that there was an increase in borrowers rated prime after the government sent out pandemic-related payments.

The household debt service ratio increased somewhat in the first half of 2022, the Fed said, but the ratio remained at moderate levels after hitting a historic low in the first quarter of 2021.

Only a small share of household debt has a floating rate.

Mortgage debt accounts for about two-thirds of total household debt. In recent year, new mortgage extensions have skewed heavily toward prime borrowers, with originations of subprime loans adjusted for inflation running at 25% of the peak level of 2006.

Only 1.9% of mortgage borrowers had negative equity in the second quarter of 2022.

The remaining one-third of household debt was consumer credit, which is mainly student loans, auto loans and credit card debt. Inflation-adjusted consumer credit edged down as the increase in credit card debt was offset by declines in student loan debt and auto debt, the Fed said.

While auto loans in delinquent status have increased significantly in the past year, the increases were to modest levels seen over most of the previous decade.

There has been double-digit nominal credit card debt growth, but revolving balances remain about 10% below pre-pandemic levels.

With the rise in balances, delinquency rates started to increase from a year earlier among subprime borrowers.

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