American households had record debt when the coronavirus hit. Things are about to get worse

Before the coronavirus pandemic spooked stock markets, rattled the economy and upended the financial lives of millions of people, household debt in the United States had already reached an all-time high.

The New York Federal Reserve announced on Tuesday that debt held by U.S. households rose 1.1% to $14.3 trillion in the first quarter. That’s $1.6 trillion more than the previous high of $12.7 trillion reached in 2008.

The report looked at consumer debt and credit data as of March 31. At that time, coronavirus lockdowns were already in place across much of the country. But given the one-month lag in reporting the credit accounts used in the analysis, the report does not reflect the potential impact in the second half of March.

“It is critical to note that the latest report reflects a time when many of the economic effects of the COVID-19 pandemic were only beginning to be felt,” said New York Fed senior vice president Andrew Haughwout. “We will continue to closely monitor these developments and the broader state of household balance sheets as key data is updated and the economic situation evolves.”

Before the pandemic hit, the unemployment rate was historically low and low interest rates encouraged consumers to spend.

Mortgage balances, which are the largest component of household debt, rose $156 billion in the first quarter to $9.71 trillion. About 0.9% of mortgage balances became delinquent for 30 days or more and about 75,000 homeowners had a new foreclosure rating added to their credit reports during the first quarter, the Fed reported. This figure is low by historical standards and can serve as a benchmark before the effects of the pandemic really hit.

More recent figures show that owners are beginning to struggle. At the end of April, 3.8 million homeowners were bound by forbearance agreements, meaning they were delaying their mortgage payments because they were unable to pay them, according to the research and data firm on Black Knight housing. This includes 7.3% of all mortgages.

A silver lining in the report: There was a $34 billion drop in credit card balances during the first quarter, which was larger than that seen in the same period last year. This gives a little more leeway to consumers in financial difficulty who can now turn to their credit cards to cover their expenses.

Credit standards tightened slightly in the first quarter, with the median credit score of new auto and mortgage borrowers rising from the last quarter of 2019.

Outstanding student debt was $1.54 trillion in the first quarter, an increase of $27 billion from last quarter. Auto loan balances were $1.35 trillion, up $15 billion from last quarter. Student loans have received some relief from the government to help hard-hit borrowers who cannot make payments.

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