Americans took on an additional $1 trillion in debt in 2021 as they purchased homes and cars, the largest increase since 2007.
U.S. households started accruing more debt last year as the savings rate rose. The total debt of households increased by $1.02 trillion in 2021, according to the Federal Reserve Bank of New York on Tuesday.
The last record was set in 2007 when household debt jumped by $1.06 trillion.
The total amount of debt accrued by consumers is now $15.6 trillion, which rose from the $14.6 trillion a year earlier.
“The typical pattern in previous economic cycles has been that consumers spend less and pay down debt during a recession but that during the rebound and subsequent economic expansion, spending rises and so too does credit card debt,” Greg McBride, chief financial analyst at Bankrate, a financial data company, told TheStreet.”True to form, that is playing out again.”
The surge in prices for both homes and autos contributed to the sharp increase in debt levels. In 2021, the average price of a home increased by 21%, which priced out many first-time homebuyers.
As many people moved away from cities and into the suburbs, some consumers purchased both used and new cars. The increase in demand and supply chain issues drove up costs. The amount of auto loan originations rose to a new record of $734 billion.
Credit card debt balances remain at good levels as consumers owed $856 billion in 2021, compared to $927 billion in 2019.
Consumers did spend more money in the last quarter of 2021, adding on a whopping $52 billion in debt.
That is the largest increase in a quarter, according to the quarterly report from the New York Fed, which utilizes data from credit scoring agency Equifax.
The three or more rate hikes that the Federal Reserve have planned for 2022 and the ongoing inflation rates will impact consumer spending and savings levels, he said.
“Higher prices are stretching household budgets in ways we haven’t seen in decades, with consumers increasingly leaning on credit in response,” McBride said.
“And this comes at a time when we’re on the cusp of rising interest rates, which will be just another form of inflation as the debt accumulated to this point will need to be paid back at progressively higher interest rates.”
Income levels did increase during 2021 so the rise in loans obtained by consumers is not currently a cause for concern, according to New York Fed economists.
The gains occurred across all income levels, but the largest ones were received by the richest Americans, said the Federal Reserve. Consumer loans are still being repaid by Americans and the levels of delinquency remain at record lows.
The majority of the debt, or 87%, is tied to mortgages, giving homeowners an opportunity to gain some equity in their new homes as valuations rise over time.