Household balance sheets ‘remain strong’ and debt vulnerabilities moderate, Fed survey finds

US household balance sheets remained strong in the first half of this year as the debt-to-GDP ratio fell slightly, according to new Federal Reserve research on Friday.

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

Economists are watching the health of US households closely, as consumer spending accounts for about 70% of gross domestic product

The Fed said that going forward, inflation and rising borrowing costs could pose risks to households’ ability to service their debt, especially for those who hold resettable-rate products. .

An economic slowdown or a correction in house prices would also put pressure on household balance sheets.

During the first six months of the year, the ratio of household debt to GDP fell slightly and remained at levels similar to those that existed before the accumulation preceding the financial crisis of 2007-2009, a said the Fed.

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

Many households have begun to tap into savings reserves that had built up during the pandemic and some households remain in financial difficulty, the Fed said.

Borrowing for near-prime and subprime borrowers fell over the period. One caveat is that there has been an increase in the number of prime-rated borrowers after the government sent pandemic-related payments.

The household debt-service ratio rose somewhat in the first half of 2022, the Fed said, but the ratio remained at subdued levels after hitting an all-time low in the first quarter of 2021.

Only a small part of household debt has a variable rate.

Mortgage debt accounts for about two-thirds of total household debt. Over the past year, new mortgage extensions have strongly favored prime borrowers, with subprime inflation-adjusted lending at 25% of its 2006 record high.

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

The remaining third of household debt was consumer credit, which consists mostly of student loans, auto loans and credit card debt. Inflation-adjusted consumer credit fell slightly as higher credit card debt was offset by lower student loan debt and auto debt, the Fed said.

Although delinquent auto loans increased significantly over the past year, the increases were at modest levels seen for most of the previous decade.

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

As balances increased, delinquency rates began to rise from a year earlier among subprime borrowers.