Household Debt Stalls Despite Auto Loan Rise

Overall household debt remained generally flat in Q2 with a slight 0.2 percent drop from Q1. Consumers shied away from the mortgage market, but increased debt levels in most other categories.

Rev the Debt Engine:

With a Few Skips Following a year of solid gains in household debt, total credit declined $18 billion in the second quarter, with home lending exhibiting the largest drag (top chart). Home equity lines of credit (HELOC) fell $5 billion in the second quarter, and mortgage lending, which accounts for roughly 70 percent of all household debt, declined $69 billion. These losses were offset, however, by gains in every other lending category.

The largest positive contributor to total credit was lending for auto loans, which increased $30 billion. The balance of new auto originations rose to the highest level in 8 years while the balance of mortgage lending originations fell to the smallest level in over a decade. These new auto originations may not be all good news, however. Most subcategories of loans have seen delinquency rates fall quickly in recent years, including credit cards and mortgages, which saw 2.4 and 2.0 percentage point drops over the past year, respectively. The auto loan delinquency rate has remained mostly flat, and saw a much slower decline of 0.7 percentage points over the past year to the current rate of 3.3 percent (middle chart).

Nonrevolving consumer credit (student and auto loans) has comprised the majority of the gain in credit market lending since the past recession. Some of these gains in nonrevolving consumer loan amounts may be due to increased lending in the subprime market, and could simultaneously be responsible for the increase in delinquency rates. However, only 3.3 percent of auto loans are actually delinquent—2 percentage points lower than at the peak of the recession—which should not prove a huge detriment to the overall health of the loan market. Student loans may require more careful monitoring, however, as delinquency rates hover in the 10-12 percent range.

Improving Market for Mortgage Lending

Mortgage lending delinquency has continued to follow a downward trend. Only 3.4 percent of mortgages are considered delinquent (compared to the 3.7 percent seen in Q1) and rates remain far below the 8-9 percent delinquency range seen following the past recession. Of the mortgage accounts that were 30-60 days delinquent in Q1, 35 percent of them transitioned back to “current” in Q2, while only 18 percent changed to 90+ days delinquent. The improving delinquency rates and transition rates are a sign that household finances are improving. The level of total credit inquiries, which typically act as a proxy for loan demand, rose for the fourth-straight quarter at a 2 percent year-over-year pace to $162.5 million (bottom chart). Given declining delinquency rates and a pickup in credit demand, the lending market should be in line for further improvements—along with continued gains in consumer spending.