With wage growth failing to keep up with the pace of inflation over the past year, many households feel increasingly burdened paying for necessities such as gas, food, medical bills, and housing payments, according to a new study from Fannie Mae [1]. To maintain spending, many have turned to drawing down previously built-up savings from the COVID-19 period and related stimulus programs, while also increasingly taking on more consumer debt.
While inflation appears to be cooling, consumer spending still significantly exceeds its historical trend relative to disposable income, resulting in a near record-low personal savings rate this past fall of 2.4% (compared to a more typical 7-9 percent).
Meanwhile, outstanding revolving consumer credit (mostly card debt) is growing briskly, rising 17% on an annual basis in November, the fastest pace since 1996, according to the Federal Reserve. And now, consumer debt delinquency rates have begun to rise. The unsustainable growth in consumer debt to maintain household expenditures may soon be coming to an end, and it's likely to have implications for the general economy and the housing and mortgage markets.
Over the course of 2022, from April to September, Fannie Mae's National Housing Survey examined some of the challenges that consumers are facing amid high levels of inflation, including the ability to save money, concerns over being able to pay for necessities, and the topic of household debt. This helped paint a picture of the state of households' finances entering this year.
Many consumers cite problems affording household necessities
- Amid rising prices, surveyed consumers' top areas of concern were gas, food, and medical care. More than one-third of consumers expect their ability to pay for food (35%), medical care (34%), and gas (33%) will be impacted in the next 12 months (as of September). Across all of these categories, respondents polled in September expressed more concern than those surveyed in April.
- Among those surveyed in September, 26% of consumers expressed concern about making future mortgage/rent payments, up from 18% in April. This concern was far higher among renters (39%) than mortgage holders (22%), but both groups increased significantly from April to September (renters up 8%, mortgage holders up 7%).
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- More than a quarter (28%) of the general population reported not being able to save any money as of September (up from 23% in April), indicating a growing group at risk of depleting their savings should any shocks to income occur in a potential recession. Renters were more likely to report not being able to save (35%) than mortgage holders (28%), but mortgage holders grew far more significantly over time (from just 18% unable to save in April, compared to 32% of renters in April).
Household Debt Grows, Increasing Levels of Consumer Stress
- Consumer stress over their ability to make debt payments in Q3 2022 (35% very/somewhat stressed) was higher than we have seen historically – primarily driven by credit card debt. This is 10 percentage points higher than the last time we asked the question in Q2 2020 (25%), at the beginning of the pandemic.
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- Roughly one-in-five consumers (22%) said their debt is higher now than it was a year ago – which was significantly higher than when we last asked this question in 2013 (13%). The increase was most apparent among renters aged 18-34, as well as among Black and Hispanic respondents.
- Among consumers who said their debt was significantly higher compared to a year ago, 39% attributed it to higher credit card debt, roughly twice as high as medical/health loans (21%) and auto loans (17%). Nearly 50% of consumers aged 35-44 and more than half of consumers in households earning between 80% to 120% of area median income reported significantly higher credit card debt.
What It Means for Housing
- As debt stress mounts for renters, their ability to save for a down payment on a home will be further challenged. This may continue to limit first-time homebuyers and drive a continued demographic shift in homebuying, which now favors even more heavily wealthier consumers. According to an annual survey by the National Association of Realtors (NAR), first-time homebuyers comprised only 26% of home purchases in 2022. This metric is down from 34% compared to 2021 and is now at its lowest level since NAR began collecting data (historically, first-time homebuyers have made up approximately 40% of purchases).
- A growing share of mortgage borrowers report being stressed in their ability to make debt payments as well as an inability to save money. This points to a risk that a growing share of current borrowers may be vulnerable to becoming delinquent on their mortgage payments if they were to experience a job or other income loss.
- For the broader economy, consumers may soon cut back their spending to a greater degree, adding to risk of a recession occurring over the next year. If this were to occur, it would likely reduce demand for housing and provide lesser support for home sales, home prices, and mortgage originations.
To read the full report, including more data, charts and methodology, click here [1].