State of the Union: Drowning in debt
The affordability debate needs to include solutions for rising household debt
Affordability is the concern hanging over Tuesday’s State of the Union address. As President Trump readies his remarks, new research from the Urban Institute suggests policymakers may be overlooking a critical signal already flashing red for consumers: rising household debt distress.
The think tank’s latest analysis says decades of evidence point to a clear conclusion — durable affordability gains come from structural fixes like expanding housing supply and raising incomes. But those solutions are slow-moving, and in the meantime, many Americans are turning to debt to bridge the gap.
That’s where the research intersects with a troubling reality already unfolding in credit markets.
Affordability stress is showing up in delinquencies
Recent data from the Federal Reserve Bank of New York and consumer groups has documented rising delinquencies in auto loans, credit cards, and some subprime mortgages — a trend consumer advocates say reflects a deeper affordability squeeze.
When essential costs outpace wages, households often compensate with borrowing. That makes debt trends a real-time indicator of affordability stress.
In that sense, today’s delinquency uptick may be less about irresponsible borrowing — and more about structural cost pressures that policy hasn’t resolved.
Housing still drives the math
Urban researchers say housing remains the biggest affordability lever. Expanding supply — particularly affordable and entry-level homes — consistently lowers long-term costs.
Tools like down payment assistance can help buyers now, but without more housing inventory, subsidies risk pushing prices higher by boosting demand without increasing supply.
That dynamic has implications beyond homeownership. When housing costs rise, families often rely more heavily on credit cards and personal loans to cover everyday expenses — a pattern now visible in delinquency data.
Credit policies can backfire
The report also warns that well-intentioned consumer credit policies can produce unintended consequences.
Interest-rate caps, for example, may lower costs for some borrowers but can also reduce access to credit or push households toward higher-cost alternatives, depending on how they’re designed.
That tradeoff is already visible in parts of the subprime auto market, where tighter lending standards have coincided with higher delinquency rates among remaining borrowers.
In other words, blunt affordability tools can shift stress rather than eliminate it, the research indicates.
It’s not just prices — it’s incomes
A major takeaway from Urban’s research is that affordability isn’t solely about lowering prices. Raising incomes matters just as much.
Policies that improve wages, job quality, and labor market stability can materially improve affordability by boosting household balance sheets — and reducing reliance on debt.
That distinction matters for interpreting today’s delinquency data. Rising defaults may reflect stagnant real incomes as much as rising costs.
The affordability–debt feedback loop
Taken together, the evidence points to a feedback loop:
Higher living costs push households to borrow.
Rising debt burdens increase delinquency risk.
Credit tightening follows, reducing financial resilience.
Households become more vulnerable to future price shocks.
Once that cycle begins, it can be difficult to reverse — especially for lower-income consumers who lack savings buffers.
Consumer advocates say that’s why delinquency data deserves more attention in affordability debates. It shows not just what prices are doing, but how families are coping.
What actually works
Urban’s synthesis of the research points to several approaches with strong evidence:
Build more housing, especially affordable units.
Expand targeted homebuyer supports like down payment assistance.
Improve financing for housing construction and rehabilitation.
Strengthen wages and job quality alongside cost interventions.
The common thread: policies that increase supply or household income tend to deliver more durable affordability gains than short-term price controls.
Why the politics lag the evidence
If the solutions are well understood, why does affordability remain so stubborn?
Many of the most effective fixes are politically difficult. Housing supply reforms often require local zoning changes. Wage gains depend on labor market dynamics. And targeted subsidies demand sustained funding.
That gap between evidence and implementation may explain why affordability has increasingly shown up in credit data before it’s resolved in policy.
What it means for consumers
For households already feeling squeezed, the takeaway is sobering.
Rising delinquencies may be an early warning that affordability pressures are becoming systemic, not temporary. And if history is a guide, quick policy fixes are unlikely to deliver immediate relief.
Instead, the most meaningful solutions may be the least dramatic: more housing, stronger incomes, and policies that reduce reliance on debt rather than simply reshaping it.
Until then, consumer balance sheets may continue to serve as the clearest real-time measure of the affordability crisis — one missed payment at a time.
Debt Watch
Key indicators showing how affordability pressures are hitting household balance sheets
Credit cards:
Delinquency rates have risen steadily since 2022, with younger and lower-income borrowers showing the fastest deterioration.
Revolving balances remain near record highs, reflecting reliance on credit for everyday expenses.
Auto loans:
Subprime auto delinquencies are approaching — and in some segments exceeding — pre-pandemic levels.
Consumer advocates warn that long loan terms and high vehicle prices are amplifying default risk.
Mortgages:
Overall mortgage delinquencies remain relatively low due to locked-in low rates.
But stress is rising in newer high-rate loans and among FHA borrowers.
Student loans:
Payment restarts have reintroduced delinquency risk after years of pandemic-era relief.
Early indicators suggest repayment strain among lower-income borrowers.