U.S. household debt increased by $1 trillion in 2021, the most since 2007

Housing boom comes to Florida
Carpenters work on building new townhomes that are still under construction while building material supplies are in high demand in Tampa, Florida, U.S., May 5, 2021. REUTERS/Octavio Jones

Feb 8 (Reuters) - U.S. consumer debt loads grew in 2021 by the largest amount in 14 years as people ramped up borrowing to afford homes, cars and other goods that are becoming more expensive, according to a report released on Tuesday by the New York Federal Reserve.

The higher borrowing was fueled in part by rising prices as consumers cope with the strongest inflation seen in nearly four decades. And households, supported by increased savings and higher incomes, seem to be handling the larger debt loads well so far, researchers said.

"The aggregate balances of newly opened mortgage and auto loans sharply increased in 2021, corresponding to increases in home and car prices," Wilbert Van Der Klaauw, senior vice president at the New York Fed, said in a statement.

Total household debt grew by $1 trillion last year, marking the largest increase in overall debt since 2007, according to the New York Fed's quarterly report on household debt and credit. The total debt balance is now $1.4 trillion higher than it was at the end of 2019.

Over $4.5 trillion in mortgages were originated in 2021, reaching a historic high for the database, which goes back to 1999. Mortgage balances increased by $258 billion in the fourth quarter to $10.93 trillion at the end of December.

Auto loan originations returned to pre-pandemic trends but loan amounts increased in response to rising car prices, New York Fed researchers said. "As car prices have soared, buyers have borrowed more to finance the additional cost," researchers wrote in a separate blog post published on Tuesday.

Some borrowers anticipating higher interest rates may also be taking advantage of lower borrowing costs, researchers said, noting an increase in mortgage refinancing.

Fed officials are expected to start raising interest rates in March and to begin shrinking their balance sheet holdings later this year. Both actions could increase borrowing costs as the Fed works to tame inflation and remove the support offered during the pandemic.

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In a sign that consumers are returning to their pre-pandemic spending habits, credit card balances also increased by $52 billion in the fourth quarter. That marked the largest quarterly increase observed in the history of the data, but credit card balances are still $71 billion lower than they were at the end of 2019.

Credit card use typically rises in the fourth quarter as people make holiday purchases, but the increase could also reflect higher prices for goods and services, researchers said.

Households in aggregate have so far been able to absorb the higher debt loads and delinquencies remain low, thanks in part to savings accumulated earlier in the pandemic and forbearance programs, researchers said.

"The economy is recovering, incomes are up and households have the capacity to add debt," said Tim Duy, a University of Oregon professor and the chief economist of SGH Macro Advisers.

The share of disposable income that households spend on rent, loan payments, taxes and other bills is low by historical standards, Duy said.

Still, some borrowers that haven't fared well during the pandemic could have a harder time keeping up with their debt payments later, New York Fed researchers said.

It will be important to watch how some borrowers fare after they need to resume student loan debt payments in a few months, they said.

Reporting by Jonnelle Marte; Editing by Howard Goller and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Reporter covering the Federal Reserve and the broader economy, including stories about how financial markets and consumers are affected by shifts in monetary and fiscal policy. Work has focused on gender and racial disparities in the labor market, with an emphasis on policies impacting working women.