The US economy has indeed performed well in the past year against the backdrop of high inflation and interest rates, but for many American borrowers, they have not felt the sweetness of good times
This year, most predictions that the US economy would fall into recession have disappeared; At the official data level, American employers are adding seemingly healthy job opportunities every month; American households are also continuing to spend money on consumption - as many had already locked in ultra-low mortgage rates before the Federal Reserve began aggressive interest rate hikes to curb inflation in 2022.
However, those Americans who need to borrow are now in a more precarious situation.
Note: The deep red line represents the total interest expenses of unsecured consumer loans, while the light red line represents collateralized debt
After nearly ten interest rate hikes by the Federal Reserve in the past two years, the cost of buying a house, car, or credit card for Americans has reached its highest level in decades. According to the Bureau of Economic Analysis of the US Department of Commerce, the total amount of mortgage interest paid by US consumers in 2023 increased by 14% compared to the previous year. The interest rates on other types of consumer debt, such as credit cards and car loans, have surged by 50%.
This situation has not actually improved since the beginning of this year. The Federal Reserve only expects to cut interest rates once this year in the dot matrix of its June meeting, although expectations of a rate cut have warmed up this month after inflation and employment data slowed in recent weeks. However, the benchmark interest rate may still remain at a high level of around 5% before the end of the year.
In fact, many American families have already spent a large amount of cash accumulated during the pandemic stimulus period. Although inflation has significantly eased in the past year, the faster than usual rate of price increases in recent years has objectively increased the burden on American consumers.
According to data from Moody's Analytics, over three-quarters of the excess savings in the United States are concentrated in the top 10% of households with an annual income of $245000 or more.
Note: Excess savings of people with different incomes
More and more ordinary households are relying on credit card consumption, and they are increasing their credit card borrowing scale month by month.
According to data from the New York Federal Reserve, the balance of US credit cards has increased to $1.1 trillion in the first quarter of 2024, the second highest level in history after the fourth quarter of last year, and an increase of about one-third compared to 2022. According to TransUnion, an American consumer credit reporting agency, the average credit card debt balance of individual borrowers exceeded $6000 in the first quarter, an increase of nearly a quarter from two years ago.
What is even more worrying is that such growth has occurred despite credit card interest rates hitting new highs repeatedly. According to data from the Federal Reserve, the average annual interest rate for credit card repayments this year has reached around 22%, the highest since 1996. By comparison, the average credit card interest rate two years ago was only about 15%.
Borrowers or store credit cards with lower credit scores often have higher interest rates than the average. Therefore, for these borrowers, higher interest rates will quickly accumulate a snowball like debt. According to Bankrate data, at a typical annual interest rate of 29%, based on an average loan balance of approximately $6200 per credit card, the minimum monthly payment will exceed $200. At a 22% interest rate, it is approximately $175, while at a 15% interest rate, it is approximately $140.
Note: Schematic diagram of interest and principal under different annual interest rates
This has resulted in an increasing number of borrowers failing to repay on time, especially those with high debt levels. According to data from the Federal Reserve, the delinquency rate of credit card accounts exceeded 3% in the first quarter, the highest level since 2011. According to data from the New York Federal Reserve, about one-third of borrowers who have almost or completely maxed out their credit cards have defaulted on their credit card balances.
Note: The delinquency rate varies depending on the proportion of credit card credit limit used. The top one is the basic credit card delinquency rate
For many Americans who did not buy a house before the mortgage interest rate doubled in 2022, owning their own home has become an increasingly unattainable dream. Potential sellers (i.e. those who already own the property and are considering selling it) are unwilling to give up their existing low interest mortgage loans, so they choose not to sell the property, which leads to a decrease in inventory of properties for sale in the market and keeps house prices high. At the same time, the proportion of renters who default on their debts is significantly higher than that of homeowners.
Note: The proportion of self owned houses and tenants who default on paying bills, with gray indicating tenants and red indicating self owned houses
More and more Americans are using "buy now pay later" services for consumption. Buy before pay "is a financial technology loan product that has emerged in recent years and usually does not appear in credit reports. According to Bankrate data, over one-third of Americans have used at least one "buy now pay later" service at checkout.
Last fall, with the end of the federal student loan relief program, student loans resumed payments, and some student borrowers were in a worse financial situation than two years ago. According to data from the US Department of Education, about 40% of student loan borrowers have missed the first scheduled repayment time.
In addition, since the historic rise in car prices caused by the pandemic, an increasing number of borrowers have also become unable to repay their car loans. According to data from Moody's Analytics, the write off amount of non-performing car loans by banks has recently reached its highest level since 2011.
Not only are car loan interest rates continuing to rise, but other expenses for car buyers, such as vehicle insurance, maintenance, and repair costs, are also skyrocketing.
According to data from automotive research websites Edmunds and Cox Automotive, an increasing number of car loan borrowers are owing more than the value of their cars, and the number of vehicle repossessions due to inability to repay is also on the rise
Note: The proportion of bad debts in car loans, with red representing banks and orange representing non bank financial institutions
All of these seem to have continued to amplify the pressure of interest rate cuts on the Federal Reserve. And now, as the chairman of the Federal Reserve, has Powell felt the "pain" of American borrowers?
转播
