When the Household Pie Shrinks, Who Gets Their Slice?

Jacob Conway, Natalia Fischl-Lanzoni, and Matthew Plosser

When households face budgetary constraints, they may encounter bills and debts that they cannot pay. Unlike corporate credit, which typically includes cross-default triggers, households can be delinquent on a specific debt without repercussions from their other lenders. Hence, households can choose which creditors are paid. Analyzing these choices helps economists and investors better understand the strategic incentives of households and the risks of certain classes of credit.

In light of the recent rising trends in consumer delinquencies, we are revisiting a prior Liberty Street Economics post on the payment priorities of households. A key distinction from the typical analysis of defaults is our focus on not whether households default, but if they do, which credits they choose to forego. To do so, we use data from the New York Fed Consumer Credit Panel / Equifax (CCP) to identify households with multiple debts and their delinquency patterns, enabling us to construct a “head-to-head conflict” among different types of debt. In other words, if a consumer chooses to repay all of their auto loans while defaulting on their consumer debt, that would constitute a win for auto loans over consumer debt. We exclude student debt from the analysis due to complications from student debt payment freezes.

Within our sample of multi-credit households, we can see the recent upward trend in credit card defaults. However, we can also see that mortgage defaults have been declining since 2010 and auto loan defaults since 2020. So, even as credit card delinquencies have turned upward, other categories of credit look relatively healthy.  

Using this sample of borrowers, we explore debt prioritization for households with multiple types of credit. The chart below illustrates the prioritization of debts over time: a high number means consumers are more likely to repay the loan on time, and a low number means they choose to be delinquent on that debt category.

Recently, we explored the decline in priority for auto debt going into the COVID-19 pandemic. However, we can see auto debt prioritization has been rising since 2020. One explanation for this may be that following COVID the price of cars has surged, thereby incentivizing consumers to stay current on these loans, although further analysis is warranted around auto debt. Here, we investigate the increased prominence of mortgage prioritization relative to both credit card and automobile loans. Since 2011, we have seen a steady rise in the mortgage prioritization rate, reaching a peak in 2020 and remaining elevated relative to credit card and auto.  

Mortgage Prioritization 

In an earlier post, we noted that mortgage prioritization was correlated with housing price declines during the Global Financial Crisis (GFC). The idea is that the lower the equity value is in a home, the less there is an incentive to stay current on the mortgage. Since our last post in March of 2021, housing prices have continued to rise. Moreover, interest rates have also risen. Given that many households financed mortgages at low-fixed rates, the value of mortgage debt has declined–further increasing the equity value of homes. A simple discounting model where the present value (PV) of a payment (C) is lower the higher the discount rate (r), PV = C/(1+r), illustrates that a fixed payment has a lower present value as rates rise. 

The chart above illustrates the trends in the Zillow Home Value Index as well as the average 30-year mortgage. Both have risen since the GFC, suggesting that households have more equity in their homes and that the present value of the debt has declined. In tandem, these factors could push households to want to avoid foreclosure and maintain the net worth they have in their house.  

If households prioritize mortgage debt because they recognize that the equity value in their homes has risen, we should see that this increase in prioritization is greater in areas with greater home price appreciation. It should also be greater for loans issued at lower interest rates. We examine both of these channels by calculating debt prioritization rates on subsamples of consumers with different home equity price changes and mortgage rates. 

The Role of Home Prices 

First, we examine if areas with greater price appreciation prioritize mortgages more than other areas. We determine the change in home value from 2016 to 2024 using zip-code level price indices from Zillow. If the consumer does not have a corresponding Zillow zip-code index, we use the state level housing index. We calculate the change in the housing index from 2016 to 2024 at the consumer’s address, split our sample into terciles based on this change, and calculate prioritizations on these subsamples. This enables us to compare prioritization rates for those who saw the largest increase in their home equity and those who saw a comparatively smaller increase. 

The chart above compares the three terciles. The lowest tercile saw a house price return of roughly 37 percent over the period 2016 to 2024, whereas the highest tercile saw home prices increase by twice that amount (75 percent). We can see that the mortgage prioritization rate was higher in areas that experienced greater home price appreciation, particularly following 2020 when prices grew even faster and the gaps between terciles expanded. Finally, we see a convergence between the three terciles and a slight drop in the prioritization rate for all of them in 2024. Nevertheless, the prioritization increases with the degree of home price appreciation. 

The Role of Mortgage Rates 

Next, we examine prioritization rates by terciles of the 30-year fixed rate mortgage based on the date of the mortgage origination. We identify the date the mortgage was originated through the CCP dataset. Again, we divide our dataset into terciles based on the average 30-year fixed rate mortgage as of the financing date. Tercile 3 corresponds to mortgages that were taken out when rates were higher (5.7 percent on average). Tercile 1 are mortgages that were originated when rates were lower (3.3 percent). The middle tercile had an average rate of 4 percent. If households prioritize repayment when their rate is lower, we expect to see that the 1st tercile prioritizes mortgages more. The opportunity cost of defaulting and having to take out a more expensive mortgage is greater for them than consumers who already have a higher rate.  

Before describing the results, this analysis requires several caveats. First, it may be that borrowers with high mortgage rates are different on multiple dimensions. For instance, borrowers with persistently higher rates may be less sophisticated or riskier than their peers with lower rates. Also, as mortgage delinquencies become exceedingly rare, it is difficult to distinguish prioritization rates as the likelihood of default for each category is so low. 

In the chart above, we see higher prioritization rates for the first and second terciles (those with the lowest interest rates) through 2016-22. The differences then tend to converge in the latter half of the sample when interest rates rise. Hence, there is not material evidence that households that pay lower rates increased their prioritization relative to households with higher rates. This may be due to the paucity of delinquencies overall during the final years of the sample (as shown in the first chart). Rather, the persistent differences in mortgage priority in a low-rate environment suggest that high-rate borrowers may in fact be fundamentally different than borrowers with low rates.

Summing Up 

We find that prioritization behavior suggests that households are increasingly emphasizing their auto loan and mortgage payments. Along with greater financial stress, this continuing shift in prioritization could contribute to rising credit card delinquencies. We investigate several reasons for the return to prominence of mortgage debt. First, home equity values are higher, and when there is equity value in a home, default is more costly. Second, interest rates are such that most households face a greater loss of value if they default or refinance their home. We find evidence that suggests home values and low mortgage rates are related to the high priority given to mortgage payments. However, there may be other unobserved factors related to differences in home owners that also contribute to consumers prioritizing these debts.  

How to cite this post:
Jacob Conway, Natalia Fischl-Lanzoni, and Matthew Plosser, “When the Household Pie Shrinks, Who Gets Their Slice?,” Federal Reserve Bank of New York Liberty Street Economics, March 6, 2025, https://libertystreeteconomics.newyorkfed.org/2025/03/when-the-household-pie-shrinks-who-gets-their-slice/.

Jacob Conway is an assistant professor of economics at the University of Chicago Booth School of Business.

Natalia Fischl-Lanzoni is a research assistant at FutureTech and a masters student at NYU Courant, studying computer science.

Matthew Plosser is a financial research advisor in the Federal Reserve Bank of New York’s Research and Statistics Group.