Brown on Business

February 22-28, 2021

American consumer continues unabated spending spree amid isolation


By Wesley Brown


The Federal Reserve Bank of New York’s Center for Microeconomic Data on Feb. 17 issued its highly watched quarterly report on the nation’s household debt and credit.


While there may be a perception that individuals and families are saving more and spending less during the COVID-19 quarantine, the reality is somewhat different.  At the end of 2020, the New York Fed’s report shows that total household debt increased to $14.56 trillion, up 1.4% or $206 billion compared to the fourth quarter of 2020, driven in part by a steep increase in mortgage originations. 


The nation’s total debt balance is now $414 billion higher than the year prior before the COVID-19 health crisis was declared a global in the first quarter of 2020. The outlier in the past year, of course, has been the nation’s hot housing market.


Last month, Seattle-based Zillow Group Inc reported that home value growth continued its meteoric rise in December as towering demand for homes carried on into winter. Heading into 2021, the West Coast real estate data analytics firm said houses today are going under contact quickly and sales far outpace the year prior as all-time low mortgage rates help keep monthly payments manageable, despite rising prices. 


Typical home values in the U.S. climbed to $266,104, up 8.4% from a year ago -- the highest annual increase since January 2014. Home value growth over the last quarter in the U.S. was 3.2% -- higher than at any time since the Zillow Home Value Index (ZHVI) series began in 1996. 


Nationally, most metros took part in this late surge in appreciation as the nation’s housing market rode a wave of high demand deep into the first quarter of 201. For example, the Sun Belt produced growth standouts including Austin -- the metro predicted to be hottest in 2021 -- which saw 5.3% growth over the previous quarter, while Phoenix, San Diego, and Salt Lake City all clocked 5.1% growth. 


“The housing market ended 2020 with an exclamation point, as home values rose sharply near the end of the year at their fastest quarterly rate on record,” said Jeff Tucker, senior economist at Zillow. “Sales are taking place at a rapid clip as momentum gathering in the market since June is still pushing forward at full force and is expected to continue for the foreseeable future. Although prices are skyrocketing, record-low mortgage rates keep bringing buyers to the table by keeping monthly payments in reach.”    


According to the New York Fed, mortgage balances – the largest component of household debt – surpassed $10 trillion in the fourth quarter, increasing by $182 billion to $10.04 trillion at the end of December. Overall, there was $1.2 trillion in newly originated mortgage debt in fourth quarter of 2020. About 30,000 individuals had a new foreclosure notation added to their credit reports during the second half of 2020, by far the lowest six months seen since the beginning of the Fed series in 1999.


While credit card balances increased by $12 billion over the quarter, they were $108 billion lower than they had been at the end of 2019, the largest year over year decline since the series began in 1999. This overall decline is consistent with continued weakness in consumer spending and revolving balance paydowns by card holders -- also supporting the notion of spending less.


The number of credit inquiries within the past six months – an indicator of consumer credit demand – was at 120 million, a modest decline from the previous quarter. Inquiries have been subdued since the second quarter of 2020 when the large effects of the pandemic hit the U.S. Account openings declined by 5 million accounts to 190 million following larger drops in the second and third quarters of 2020.


Auto and student loan balances increased by $14 billion and $9 billion, respectively. In total, non-housing balances, including credit card, auto loan, student loan, and other debts, increased by $37 billion during the fourth quarter but remained below end-2019 levels. 


The nation’s student loan debt bubble stood at $1.56 trillion in the fourth quarter, despite a yearlong forbearance, still jumped by $9 billion increase from the third quarter. About 6.5% of aggregate student debt was 90+ days delinquent or in default in fourth quarter. The lower level of student debt delinquency former CARES Act forbearances that have been extended to Sept. 30. Auto loans and credit card delinquency transition rates also continued to decline, reflecting the impact of government stimulus programs and bank-offered forbearance and credit options for troubled borrowers.


Meanwhile, newly originated mortgages reached a record high and auto loan origination reached their second highest quarterly volume since 2000. Mortgage originations, which include refinances, were at $1.2 trillion, surpassing in nominal terms the volumes seen during the historic refinance boom in 2003Q3. Auto loan originations, which includes both loans and leases, were down slightly from the record high seen in the third quarter but were at the second highest level for the series, at $162 billion.


“2020 ended with a substantial increase in new extensions of credit, driven by record highs of new mortgages and auto loan originations,” said Wilbert Van Der Klaauw, senior vice president at the New York Fed. “Notably, the overall median mortgage origination credit scores jumped up, reflecting a high share of refinances.”


The Fed report also noted that aggregate delinquency rates continued to decline in the fourth quarter, largely reflecting an uptake in forbearances which were provided by the CARES Act or voluntarily offered by lenders. The uptake in forbearances continues to be visible in the delinquency transition rates for mortgages, as the share of mortgages that transitioned to early delinquency ticked down to 0.4%.


As of late December, the share of outstanding debt that was in some stage of delinquency was 1.6 percentage points lower than the rate observed at end-2019 before the COVID-19 pandemic hit the U.S. About 121,000 consumers had a bankruptcy notation added to their credit reports, a decline from the previous quarter and a new series low.


Meanwhile, under the Biden administration, the Departments of Housing and Urban Development (HUD), Veterans Affairs, and Agriculture on Feb. 11 extended and expanded their respective forbearance and foreclosure relief programs. These actions will directly benefit the 2.7 million homeowners currently in COVID forbearance and extend the availability of forbearance options for nearly 11 million government-backed mortgages nationwide, officials said.


Under the new leniency measures, the fourth since the COVID-19 crisis began in March 2020, the foreclosure moratorium for homeowners will continue through June 30, 2021. In addition, the so-called mortgage payment forbearance enrollment window for borrowers who wish to request forbearance will also be extended though the end of June.


Other actions taken by the new administration will provide up to six months of additional mortgage payment forbearance, in three-month increments, for borrowers who entered forbearance on or before June 30, 2020.  


What this all means, in the interim, is that American consumer continues to keep the wheel’s spinning on the world’s largest economy. COVID-19 or not.