Why is US household debt rising?

U.S. household debt rose to $13.86 trillion in the second quarter, according to new data from the New York Federal Reserve, marking the 20th quarter in a row where debt balances increased.

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In the second quarter, debt increased by $192 billion – up 1.4 percent – and it’s now higher than the previous peak before the financial crisis.

Driving activity in the housing sector during the quarter were low mortgage rates – which helped spur mortgage originations and refinance activity. Tappable levels of home equity reached a collective $5.7 trillion at the end of last year, according to Black Knight.

CoreLogic reported that the average homeowner gained $6,400 in home equity in the first quarter.

Some people have been tapping their home equity for cash-out refinances, which represent 64 percent of all Federal Housing Authority-insured refinance transactions, according to government data. They increased to 150,883 in fiscal 2018, up from 43,052 in fiscal 2013.

Even as mortgage loan debt rises, underwriting standards have remained tight, the New York Fed report noted. Only 10 percent of mortgages were originated to borrowers with credit scores below 651.

In addition to mortgage debt, auto loan balances rose by $17 billion, while credit card debt climbed $20 billion.

High levels of household debt are not necessarily a bad thing. According to a research paper from the St. Louis Fed, it can indicate that people are optimistic about the economy, that they are making investments in assets that build wealth – including education and houses – and that people have paid off their loans to qualify for new ones.

Low interest rates, which the Federal Reserve cut last month for the first time since 2008, encourage consumers to borrow.

A strong U.S. economy can boost consumer confidence and also encourage consumers to make large purchases – because they assume they will be able to make payments in the future.

A potential economic slowdown, however, could hinder people’s ability to pay off their debt.

Aggregate loan delinquency rates improved during the second quarter, though nearly 10 percent of student loan balances became seriously delinquent.

The proportion of credit card debt balances that are considered seriously past due also rose. Payments on 5.2 percent of credit balances were 90 days past due – up from 5 percent the quarter prior.

Where auto loans are concerned, however, delinquency rates declined – as they did for mortgages.

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