Household debt is at an all-time high, according to the most recent figures from the Federal Reserve Bank of New York, and Americans now owe a collective $15.8 trillion.
The numbers may be staggeringly high, but what stands out as unusual for Fed economist Andy Haughwout is that Americans have continued to take on household debt even as the country entered a recession in the spring of 2020.
“This is in stark contrast to the Great Financial Crisis, where we saw households deleverage, either by repaying debt or by defaulting on their obligations [and facing foreclosure], but also just paying them,” Haughwout said. “In this case, we see the debt continuing to grow.”
Home debt accounts for the bulk of Americans’ debt, about 71%. Even though house prices rose dramatically, people continued to buy houses. While older existing homeowners have refinanced their debt to get lower interest rates, most new mortgage debt is owned by younger people who have bought a home for the first time or traded in for more space. .
“There’s a very strong housing market there, so young people are buying houses and the houses are getting more and more expensive and that’s increasing their need to borrow to be able to afford those houses,” Haughwout said.
Until there are tons of people buying more homes than they can afford – and home values don’t drop dramatically – most economists say we’re not likely to see not a housing-based recession like we did in 2008. big, mortgage debt is a long-term investment that helps stabilize family finances and build wealth, compared to credit card debt or payday loans that come with high costs that can erode a family’s financial security.
For those who owned homes before the pandemic, the massive increase in home values meant a big increase in household wealth. In the Dallas-Fort Worth area, the value of a typical home has increased 53% since the start of 2020, according to real estate firm Zillow.
But these rising values have also deprived many people of the price of property.
For low- and middle-income people, the picture of debt during the pandemic has been grimmer, said Joanna Smith-Ramani, executive director of the Financial Security Program at the Aspen Institute.
“It’s not an easy story to tell. It contains conflicting data. Averages mean nothing. Details mean everything,” she said.
A “fragile country”
Overall, most people in the lower and middle classes aren’t much worse off than they were before the pandemic, although some are reporting more debt than when they started. That means federal stimulus programs prevented an economic freefall like the Great Recession, she said, but preserved a deeply unequal society.
“We weren’t a country of rainbows, sunshine, happiness and financial security. [before the pandemic],” she said. “We were a fragile country with about half of our country living in some kind of financial fragility.”
And as inflation continues to outpace wages, this precariousness remains a defining fact of life for many American households.
When the pandemic hit, it hit the most financially vulnerable.
Serious illness and death rates were higher among blacks and Latinos, largely because lower-income people of color were more likely to work face-to-face. This has exacerbated and lengthened the financial toll of the arrival of the pandemic, according to Mechele Dickerson, a professor at the University of Texas School of Law who studies the effects of the pandemic on financially vulnerable people.
For those without a work-from-home option, maintaining work has been challenged by unreliable childcare during the pandemic, Dickerson said. Schools and daycare centers have closed, and many older parents who normally care for children have died from the new coronavirus. In many cases, people have faced a diabolical bargain of going to work or limiting exposure to COVID.
“We really had to decide, is it worth risking my life to go and work there? And if your decision was, ‘I want to quit,’ well, the problem is you don’t get unemployment insurance because you quit,” she said. “And then that’s where the debt would come from.”
Buried in the averages
This debt is hard to see if you only look at averages. On average, credit card debt has decreased during the pandemic. It dropped dramatically the first year, then started to rise steadily since then. It remains below pre-pandemic levels.
Still, 30% of credit card holders told financial services firm Bankrate that their debt has increased and the added burden of debt hits parents with children under 18 the hardest, millennials and low-income people.
Dickerson said low- and middle-income people were more likely to lose their jobs and wages when the pandemic hit, and less likely to have paid time off when childcare failed or illness at home. house prevented them from working. And they started the pandemic without much of a financial cushion.
“Even when the recovery came back, it came back much faster for the wealthy than it did for middle-income people and the poor,” Dickerson said.
Most Americans reported increased savings by cutting spending and benefiting from federal interventions to stave off economic collapse; expanding tax credits, stimulus payments, housing assistance, student loan and mortgage forbearance, and business loans. But savings rates fell below pre-pandemic levels in 2022.
Although these federal relief programs have not reached everyone equally, Dickerson said they are helping many people stay whole.
“But you have to balance that with the medical debt that a lot of [lower- and middle-income] people incurred because the wealthy did not have the same COVID infection and death rates as the poor,” Dickerson said.
More than half of people infected with COVID-19 are now struggling with medical debt, according to the healthcare-focused Commonwealth Fund, disproportionately affecting blacks, Latinos and people with low incomes. income, who are the least likely to have affordable health care. This is even as medical debt has declined overall during the pandemic, with more comfortably situated households paying off old debt.
“Panic” by the future
Now, with the federal government’s pandemic relief programs mostly over and inflation eating away at incomes and savings, Joanna Smith-Ramani of the Aspen Institute said many expect a difficult fall and winter.
A freeze on federal student loan payments during the pandemic is set to end August 31. If the Biden administration doesn’t push back that deadline again, borrowers will be forced to start making payments again and interest will start running again.
Car and truck debt also increased significantly as growing demand met an insufficient supply of new and used vehicles. This means that people have taken out larger car loans to cover the price increase and now they are required to pay off that debt.
Research shows that despite the tight labor market, wages rose as employers sought to attract workers, but inflation rose faster than wages.
So far, Americans seem to be paying their bills. Delinquency rates haven’t increased much and there hasn’t been a wave of bankruptcies like there was during the Great Recession.
“[Despite] all the data that looks like maybe we’re doing well right now,” Smith-Ramani said, “when I talk to credit counselors, they’re kind of freaked out about the third quarter of this year.
Smith-Ramani said one way to reduce inequality in our economy from above and below is to focus on those pandemic-era financial backers — policies like expanding credit from child tax, which reduced child poverty by 30% before its end – and to make it permanent.
Do you have any advice? Christopher Connelly is KERA’s One Crisis Away reporter, exploring life on the edge of finance. Email Christopher at [email protected] You can follow Christopher on Twitter @hithisischris.
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