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US households ramp up borrowing amid COVID-19 recovery: NY Fed

A New York Fed survey using Equifax data notes that Americans are tapping a hot housing market and beginning to turn again to credit cards to spend as the economy continues to reopen.

In the second quarter, the New York Fed reported that total household debt increased by $313 billion to $14.96 trillion, the largest nominal increase in debt balances since the second quarter of 2007. By percentage, the 2.1% increase was the largest since the fourth quarter of 2013.

“We have seen a very robust pace of originations over the last four quarters,” said Joelle Scally, administrator of the New York Fed team in charge of conducting the survey.

Mortgage balances accounted for most of that increase, as American households added $282 billion in debt to $10.44 trillion at the end of June.

A hot housing market is likely behind the trend, as sub-3% mortgage rates entice prospective homebuyers. Home prices have also been soaring to record levels as short housing supply leads to bidding wars.

The New York Fed reported $1.2 trillion in new mortgage balances (including refinances) in the second quarter, outpacing volumes seen in the prior three quarters. Unlike the housing boom leading up to the 2008 financial crisis, most of the newly originated mortgages are to borrowers with high credit scores (760 or more in Equifax’s scoring system).

The survey adds that about 44% of the outstanding mortgage balance (over the last four quarters) was originated in the past year, suggesting high levels of mortgage debt churn through the pandemic.

A wild card for mortgage debt in the future: the expiry of mortgage forbearance programs, which could threaten the 2 million borrowers currently relying on the help. The federal moratorium on foreclosures expired on Saturday, July 31.

For now, the New York Fed said the share of mortgage balances 90 or more days past due fell to a historic low of 0.5%.

Credit cards will be 'big driver' of consumer credit

The survey reported that total credit card balances increased by $17 billion in the second quarter, a slight reversal of the pandemic-era trend of paydowns in credit card debt.

Banks are noticing the trend as well, with many of the large consumer credit card companies forecasting more loan growth in coming quarters. At the nation’s largest bank, JPMorgan Chase CFO Jeremy Barnum said that credit cards will be the “big driver” of consumer credit in the near future.

“We do believe that the sort of acceleration and the pickup in spend is going to translate to a resumption of loan growth in card [loans],” Barnum said on an earnings call July 13.

In the depths of the pandemic, the economic shutdown cratered consumption and borrowing. Stimulus checks and unemployment insurance led to paydowns of consumer debt across the board, but credit card spend was particularly impacted.

In the March to June period of 2020, the New York Fed reported that credit card balances saw the steepest decline in the history of the survey.

The New York Fed noted in its newest release that despite the second quarter 2021 uptick in credit card usage, balances remain $140 billion lower than they had been at the end of 2019.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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