Michelle ThompsonNotwithstanding almost two years of surging prices and increasing interest rates, Americans have continued to spend liberally, utilizing both their wallets and credit cards.
The consumer’s resilience in tolerating elevated prices has played a pivotal role in maintaining the strength of the US economy. However, there are indications that this mindset may be undergoing a shift. Experts suggest that the confluence of exorbitant housing costs, escalating credit card debt, and diminishing savings might signal the conclusion of the post-Covid spending spree, possibly even during this year’s holiday shopping season.
Erik Lundh, a principal economist at The Conference Board, anticipates that prevailing challenges will eventually compel consumers to retrench. He predicts a potential contraction in spending for a quarter or two.
Outlined below are the various pressures confronting consumers that could potentially lead to a deceleration in spending.
The expenses associated with housing have reached their highest levels in four decades.
The expenditure involved in purchasing and financing a house has surged to levels unprecedented in nearly four decades for Americans. This escalation is attributed to robust demand and a constrained supply of new homes. Despite mortgage rates more than doubling over the past year, it currently requires nearly 41% of the median household’s monthly income to cover the payments for a home with a median price, as per research conducted by Intercontinental Exchange (ICE). The last instance where housing payments reached such a proportion of monthly income was in 1984.
The current housing market is the least affordable it has been since the early 1980s.
At present, payments and interest on homes are consuming a larger share of Americans’ paychecks than at any point since 1984, coinciding with historic highs in home prices.
The issue extends beyond housing payments. As of November 16, the Freddie Mac 30-year fixed mortgage rate stands at 7.44%. Comparatively, a new homebuyer in October 1981 faced an 18.45% mortgage rate, equivalent to 55% of the median income. However, the median home price during that time was proportionally much lower than today, at $70,399 (equivalent to $231,902 in 2023 dollars), representing 3.69 times the median income. In contrast, over the past two years, the median home price has ranged from approximately five and a half to six times the median income, reaching $445,567 as of October. This ratio is higher than at any point since the collection of data by ICE, surpassing even the housing bubble of the mid-2000s.
Americans currently bear a higher level of debt than at any point in history.
Inflation has also impacted significant expenditures, with non-housing loan balances more than doubling since 2003, reaching approximately $4.8 trillion, according to data from the New York Federal Reserve. Within the past two years alone, over $500 billion of this debt has accumulated, marking a more substantial increase than any other two-year period since 2003, the earliest year for which data is available.
While part of this debt surge is attributed to the soaring prices of cars, credit card balances have experienced the most rapid growth, increasing by roughly 34% since the fall of 2021. In the same timeframe, student loan and car loan balances have grown by 10% or less, although student loan debt might see a rise now that payments have resumed.
Over the past two decades, non-mortgage loan debt has more than doubled.
Credit card debt has experienced the most rapid growth since 2021, driven by robust consumer spending following the easing of pandemic-related lockdowns.
It’s important to note that this data is not adjusted for inflation, and personal incomes have also seen growth since the pandemic. The national average wage increased by over $8,000 from 2020 to 2022, as reported by the Social Security Administration. This marks the most significant two-year increase since 1982.
While trying to cope with elevated prices has led to an increase in credit card debt, there is a concerning trend of more consumers falling behind on their payments. In the third quarter, 5.78% of credit card balances became seriously delinquent (90 days or more behind on payments), representing the largest share of new serious delinquencies. Since the first quarter of 2022, the rate of newly serious delinquent credit card debt has surged by approximately 90%.
Credit cards are demonstrating a higher likelihood of entering serious delinquency compared to other forms of household debt.
The proportion of credit card debt transitioning into serious delinquency each quarter has risen by 90% since the first quarter of 2022.
Student loan debt previously experienced the highest rates of newly seriously delinquent balances until the federal government suspended payments in March 2020 due to the Covid-19 pandemic.
The windfalls experienced during the Covid era have diminished.
A recent report from the San Francisco Federal Reserve, disclosed earlier this year, unveiled a key factor contributing to consumers’ willingness to consistently accept higher prices: substantial levels of surplus savings.
The SF Fed noted that households were saving significantly more money each month in 2020 and 2021 compared to the pre-pandemic pattern. A major factor behind this increased savings was the “refinancing boom” driven by historically low mortgage rates during that period. Between the second quarter of 2020 and the conclusion of 2021, approximately 14 million mortgages were refinanced, resulting in an estimated extraction of $430 billion in equity through lower monthly payments or cash-outs, as indicated by research from the New York Fed.
During lockdowns and the peak of the Covid-19 pandemic, consumer reluctance to venture out meant that funds typically allocated to goods and experiences accumulated in people’s savings rather than being spent.
As the impact of the pandemic diminished, consumers, eager to fulfill the experiences they were deprived of due to Covid, released a pent-up demand, according to Lundh. Over the past two years, despite the continuous rise in prices and interest rates, Americans have been depleting all those accumulated savings.
Throughout the pandemic, consumers amassed a substantial $2.1 trillion in excess savings. The San Francisco Federal Reserve’s findings as of June 2023 indicate that $1.9 trillion of that sum has already been expended.
Savings accumulated during the pandemic are nearly depleted.
Between March 2020 and August 2021, Americans saved an additional $2.1 trillion compared to the pre-pandemic scenario. Subsequently, as restrictions eased, they actively spent these savings, leaving less than $190 billion by June 2023.
“The individual will need to pause for a while,” Lundh remarked.
This implies that Americans might be compelled to curtail their post-Covid spending spree.
“At a particular juncture, this debt becomes unmanageable, and there are no more savings remaining,” Lundh explained. “We anticipate this is likely to occur to the US consumer towards the conclusion of this year and the beginning of 2024.”
Emily Martinez
