After setting records in 23 consecutive quarters, total household debt fell in the second quarter for the first time since 2014 as shutdowns associated with the coronavirus pandemic tamped down consumer spending, the Federal Reserve Bank of New York said Thursday.
Total household debt fell by 0.2% from three months earlier, to $14.27 trillion, led by a $76 billion decline in credit card balances, according to data compiled by the New York Fed and Equifax. Credit card balances had peaked at an all-time high of $930 billion at the end of 2019, but have dropped by 12% since as many consumers largely stopped traveling, visiting restaurants and curbed other activities to comply with social distancing mandates.
Auto and student loan debt remained largely flat when compared with the first quarter, but mortgage balances climbed 0.78% to $9.78 trillion as low interest rates prompted many homeowners to refinance their loans. Mortgage refinances totaled $846 billion, the highest volume since 2013, while new purchase activity declined slightly.
Though unemployment rates have soared during the pandemic, consumers have generally been able to keep up with their payments thanks in large part to government stimulus efforts that included direct payments from the Internal Revenue Service and expanded unemployment benefits.
Delinquencies fell across all debt categories, but perhaps most notably in mortgages. About 61% of mortgages that were in early delinquency in the first quarter became current in the second quarter as homeowners took advantage of offers by lenders to skip several months’ payments during the pandemic-induced economic slowdown.
Whether these trends continue in future quarters will depend largely on a number of variables, including the trajectory and severity of the pandemic, the extent of further government aid efforts and payment relief by lenders. Extended unemployment benefits of $600 per week included in the Coronavirus Aid, Relief and Economic Security Act expired on July 31, and Congress is still debating whether to extend the benefits in the next round of stimulus.
“Protections afforded to American consumers through the CARES Act have prevented large-scale delinquency from appearing on credit reports and damaging future credit access,” Joelle Scally, administrator of the Center for Microeconomic Data at the New York Fed, said in a press release. “However, these temporary relief measures may also mask the very real financial challenges that Americans may be experiencing as a result of the COVID-19 pandemic and the subsequent economic slowdown.”
Auto loans declined slightly to $1.3 trillion, most likely because many car dealerships were closed during the second quarter to comply with state-mandated shutdowns. But indications are that car buying is picking up as the employment picture brightens somewhat and more people look to avoid public transportation and ride sharing.
Student loans remained flat at $1.54 trillion, as nearly all student loan borrowers were rolled into forbearance and interest on those balances was temporarily waived as part of the CARES Act. The New York Fed said that roughly 88% of students had a scheduled payment of $0 during this time, though it noted that not all of these forbearances were new. About a quarter of student loan borrowers also continued to make payments despite being in forbearance.
