American Spending: Is it Finally Slowing Down?
Rising housing costs, soaring debt levels, and fading pandemic windfalls may signal an end to American consumers' post-Covid spending spree
Despite high prices and increasing interest rates, Americans are continuing to spend money and use their credit cards. This willingness to pay elevated prices has helped to keep the US economy stable, but this mindset may be changing soon. Experts believe that the combination of expensive housing, growing credit card debt, and diminishing savings could signal the end of excessive spending, possibly as early as the upcoming holiday shopping season.
Erik Lundh, a principal economist at The Conference Board, predicts that consumers will be forced to reduce their spending in the coming months due to headwinds.
Housing costs are the highest in 40 years
The cost of buying and paying for a house has reached a nearly four-decade high for Americans. A combination of high demand and a limited supply of new homes, along with a more than doubling of mortgage rates in the past year, means that it now takes nearly 41% of the median household's monthly income to afford the payments on a median-priced home. This research comes from Intercontinental Exchange (ICE) and reveals that the last time housing payments cost that much was in 1984.
Americans are carrying more debt than ever
Housing payments are just one aspect of the issue. As of November 16, the 30-year fixed mortgage rate from Freddie Mac stood at 7.44%. In October 1981, a new homebuyer faced an 18.45% mortgage rate, which was 55% of the median income at the time. However, the median home price in that month was significantly lower compared to today, at $70,399 ($231,902 in 2023 dollars), or 3.69 times the median income. Over the past two years, the median home price has varied from approximately five and a half to six times the median income, reaching $445,567 in October. This ratio is the highest it has been since ICE began collecting data, surpassing even the levels seen during the housing bubble of the mid-2000s.
The impact of inflation on major purchases is evident in the drastic increase in non-housing loan balances, which have more than doubled since 2003 to a total of approximately $4.8 trillion, as reported by the New York Federal Reserve. Of this, over $500 billion was accumulated in just the past two years, marking the most significant jump in a two-year period since 2003.
While a portion of this debt is linked to the soaring prices of automobiles, the fastest-growing component is credit card balances, which have surged by approximately 34% since the autumn of 2021. In comparison, student loan and car loan balances have seen growth of 10% or less during this same period, although there is a potential for student loan debt to begin increasing now that payments have resumed.
It is important to note that this data does not account for inflation, and personal incomes have increased since the pandemic. According to the Social Security Administration, the national average wage has risen by over $8,000 from 2020 to 2022, marking the largest increase in two years since 1982.
Struggling to keep up with the soaring prices has not only resulted in more credit card debt but has also caused more consumers to fall behind on their payments. In the third quarter, 5.78% of credit card balances were seriously delinquent (90 days or more behind on payments), making up the largest share of new serious delinquencies. Since the first quarter of 2022, the rate of newly seriously delinquent credit card debt has increased by approximately 90%.
Covid-era windfalls have dwindled
Student loan debt once had the highest rates of newly seriously delinquent balances before the federal government halted payments in March 2020 due to the Covid-19 pandemic.
According to a study released by the San Francisco Federal Reserve earlier this year, high levels of excess savings have been identified as a key reason why consumers are consistently willing to pay higher prices. The SF Fed reported that households saved hundreds of billions more dollars per month in 2020 and 2021 compared to the pre-pandemic trend. This increase in savings was largely attributed to the "refinancing boom" that occurred during this period of historically low mortgage rates. Research from the New York Fed indicated that 14 million mortgages were refinanced, resulting in an estimated $430 billion of equity being extracted through either lower monthly payments or cash-outs between the second quarter of 2020 and the end of 2021.
During lockdowns and the height of the Covid-19 pandemic, consumers were hesitant to leave their homes," Lundh explained. This resulted in a significant accumulation of savings, as money that would have been spent on products and experiences remained in people's savings accounts instead.
With the pandemic coming to an end, consumers are eagerly seeking experiences that were put on hold due to Covid, according to Lundh. Over the past two years, Americans have been depleting their savings despite the rising prices and interest rates. In fact, during the pandemic, consumers were able to save $2.1 trillion, of which $1.9 trillion has already been spent as of June 2023, as reported by the SF Fed.
"The consumer is going to have to take a breather for a little bit," Lundh said.
And that would mean Americans may be forced to finally pull back on their post-Covid spending spree.
Lundh stated that at a certain juncture, the debt becomes unmanageable and there are no more savings available. He anticipates this will likely occur to the US consumer by the end of this year and into early 2024.
