Consumer Credit Expands, But At a Slower Rate

March 10, 2014

The Federal Reserve Board recently reported that growth in consumer credit outstanding decelerated in January 2014. Total consumer credit outstanding rose by 5.3% on a month-over-month seasonally adjusted basis, but the January growth rate was 0.9 percentage points less than the 6.2% growth rate that took place in December. There is now $3.1 trillion in total consumer credit outstanding.

The slowdown in consumer credit growth reflected a monthly decline in revolving credit. According to the release, revolving credit, which largely measures consumer credit card debt, fell by 0.3% in January after rising by 4.3% in December. As Figure 1 illustrates, the decline in revolving credit was generally widespread amongst major revolving credit holders. Revolving credit held by depository institutions fell by $18.9 billion while finance companies saw their revolving credit holdings shrink by $2.4 billion. Revolving credit held at credit unions and nonfinancial businesses also fell. Only revolving credit held in pools of securitized assets saw a monthly increase. However, these pools, which are outstanding balances upon which securities have been issued, accounted for 4% of revolving credit outstanding. Neither the federal government nor nonprofits and educational institutions hold revolving credit.

Presentation1

Overall, the decline in revolving credit was more than offset by an increase in non-revolving credit. The release indicates that non-revolving credit, which is largely composed of auto and student loans, rose by 7.5% in January, 0.6 percentage points faster than the 6.9% growth that took place in December. However, much of the January increase in non-revolving credit was not held by the institutions that also hold revolving credit. Rather, it was held by institutions that do not engage in revolving credit lending.

As Figure 2 illustrates, total non-revolving credit rose by $33.1 billion, more than offsetting the $21.6 billion decline in total revolving credit outstanding. However, $27.6 billion, 83.4%, of the $33.1 billion increase in non-revolving credit was held by the federal government, non-profits, and education institutions. The remaining $5.5 billion was held by institutions that also hold revolving credit and only partially offset the decline in revolving credit that was held by this group. The release indicates that while total non-revolving credit growth more than offset total revolving credit decline, leading to an overall increase in consumer credit outstanding, this phenomenon did not take place at the institutional level. Instead, institutions holding revolving credit saw their net holdings of consumer credit shrink while institutions that only hold non-revolving credit saw their consumer credit holdings grow.

Presentation2


House Prices End the Year Higher

February 25, 2014

Data from Standard and Poor’s indicates that house prices rose in December 2013. According to the release, the seasonally adjusted S&P/Case-Shiller HPI – 20 City Composite rose by 0.8% in December 2013. This is the 23rd consecutive month-over-month increase for the Index. Over this time period, the Index has risen by 21.7%. For the entire year of 2013, the 20 City Composite Index grew by 13.4%.

The Federal Housing Finance Agency (FHFA) also released data on house prices. According to its seasonally adjusted House Price Index – Purchase-Only, house prices rose by 0.8% in December 2013. The FHFA House Price Index – Purchase-Only has now increased for for 24 of the past 26 months, rising by 14.8% during this period. Over the year, the FHFA House Price Index – Purchase-Only has climbed by 7.7%. As Figure 1 shows, following the 15.3% increase in the FHFA House Price Index – Purchase-Only that took place between April 2011 and December 2013, house prices are roughly the same as the level recorded in May 2005 and are now at 92% of the peak level reached in March 2007.

Presentation1

A previous post demonstrated that the recovery in house prices is a key contributor to the renewed expansion in housing equity. In a related fashion, rising house prices should also help expand the amount of homeowners with positive housing equity, shrinking the amount with negative housing equity. Figure 2 juxtaposes the FHFA House Price Index – Purchase-Only data displayed in Figure 1 onto a chart depicting the share of homes with negative housing equity. According to this chart, house prices in December 2011 were at 81% of their March 2007 peak. By September 2013, house prices reached 91% of this peak level. At the same time, the share of homes with negative equity reached 25.2% by the end of the fourth quarter of 2011. However, by the end of the third quarter of 2013, the share of homes with negative equity had fallen to 13.0%. Given that the FHFA House Price Index – Purchase Only ended the fourth quarter of 2013 at 92% of its peak, the share of homes with negative housing equity is expected to end the year even lower.

Presentation2

For full histories of the composites and 20 markets included in the Case-Shiller composites, click here cs.

For full histories of the FHFA US and 9 Census divisions, click here.


Income Growth Lagging Balance Sheet Improvements

September 26, 2013

During the second quarter of 2013, household balance sheets improved with increases in home values and reductions in mortgage debt, boosting household net worth. Since the 4th quarter of 2011, the aggregate value of owner-occupied real estate is up nearly $2.8 trillion.

However, while balance sheets in aggregate have mended since the end of the Great Recession, income growth continues to lag. The future of housing demand will be determined by, among other factors, income growth for existing workers and employment opportunities for newly forming, younger households. This will be particularly true as the share of cash buyers for existing and new homes recedes in the year or two ahead.

HH balance sheets.png

Household balance sheet repair proceeds nonetheless. The graph above plots the current value of net worth to disposable personal income (NW/DPI) and the corresponding 25-year historical average (1982-2007). The dashed blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts (NIPA).

After data revisions, as of the second quarter of 2013, the NW/DPI measure stood at a value of 6.03, above the historical level of 5.38 and significantly higher than the cyclical low of 5.13 set during the beginning of 2009. These improvements resulted in pushing the savings rate down after rising during the financial crisis and reducing household consumption.

Flow of Funds data from the first quarter of 2013 show that total home mortgage debt also continues to decline. Since the first quarter of 2008, home mortgage debt has fallen 12% or $1.32 trillion. And due to rising home prices, the value of owner-occupied homes has risen since the last quarter of 2011 by $2.8 trillion.

Home value and debt

Due to these improvements for household balance sheets, another challenge brought about by the Great Recession is a greater obstacle to future economic expansion: lagging income growth.

NIPA data for disposable personal income (blue line below) show that a gap has opened between current levels and the 2000-2003 trend (red line). More job creation and additional income growth will, if realized, help support housing demand going forward.

DPI


Consumer Credit Expands On Auto, Student Loans

September 11, 2013

Data released by the Federal Reserve Board indicates that consumer credit continued to expand in July, albeit at a slower pace than in the recent past. According to the Federal Reserve’s G.19 survey, consumer credit outstanding grew at a seasonally adjusted annual rate of 4.4% and now stands at $2.9 trillion. However, the growth in consumer credit outstanding recorded in July was 0.7 percentage points less than the 5.1% growth rate recorded in June and 2.4 percentage points less than the 6.8% growth rate recorded in May.

The expansion in consumer credit reflects a rise in non-revolving credit, but the growth rate in non-revolving credit slowed over the month. An earlier post illustrated that non-revolving credit is largely composed of auto and student loans. In July, non-revolving credit outstanding grew by 7.4%. However, the July growth rate of non-revolving credit was 2.0 percentage points slower than the growth rate recorded in June.

The rise in non-revolving credit was partially offset by a decline in revolving credit. This is the second consecutive month that revolving credit, which is largely made up of credit cards, fell. However, the rate of decline in July was smaller than the rate recorded in June. According to the release, revolving credit declined by a seasonally adjusted annual rate of 2.6%. In June, revolving credit fell by 5.2%.

Household debt data from the Federal Reserve Bank of New York indicates that historically, the amounts of credit card and auto loan debt outstanding were roughly similar. According to Chart 1, in the first quarter of 2003, the FRBNY estimated $641 billion in auto loans outstanding and $688 billion in credit card debt outstanding. By the first quarter of 2011, following the boom and bust experienced in the U.S. economy, auto loans outstanding totaled $706 billion while credit card loans equaled $696 billion. However, since the first quarter of 2011, the amount of auto loans outstanding has begun to increase while the level of credit card debt outstanding continues to decline. In the second quarter of 2013, the latest data available, auto loans outstanding had risen to $814 billion while credit card debt outstanding had fallen to $668 billion.

Presentation1

A previous post illustrated that the decline in credit card debt outstanding reflects a decrease in both the number of open credit card accounts and in the average amount outstanding. Conversely, both the number of auto loans and the average loan amount are climbing, but the average loan amount has risen more. The growth in the number of accounts and in loan size reflects consumers’ ability and willingness to finance car purchases. %. In contrast, the observed increase in mortgage demand is not being met with easier lending standards, holding back a more robust housing recovery. As chart 2 below illustrates, after dipping to 79.8 million accounts in the second quarter of 2011, the number of auto loan accounts has risen by 5.4% to 84.0 million accounts. Meanwhile, the average auto loan, calculated by dividing the total amount of auto loans outstanding by the total number of accounts, has risen by 11.9% since it reached its trough in the first quarter of 2010. Since the second quarter of 2011, when the number of auto loan accounts began to rise, the average auto loan has increased by 9.3%.

Presentation1


Mortgages Less Likely to Become Seriously Delinquent

August 20, 2013

Data released by the Federal Reserve Bank of New York indicates that aggregate consumer debt outstanding, which includes mortgages, contracted by 0.7% or $78 billion on a not seasonally adjusted basis in the second quarter of 2013. This is the second consecutive quarter that aggregate consumer debt has declined on a quarter-over-quarter basis and the 7th decline in the past two years. Over the past four quarters, which lessens the influence of seasonal factors, aggregate consumer debt outstanding has declined by 2.0% or $231 billion. Aggregate consumer debt outstanding has declined on a 4-quarter basis in every quarter since the fourth quarter of 2008. Overall, since reaching a peak in that quarter, aggregate consumer debt has contracted by 12.0% or $1.5 trillion.

According to the data, the decline in total consumer debt largely reflected a contraction in mortgage debt outstanding. Mortgage debt outstanding, which accounted for 70.3% of aggregate consumer debt in the second quarter of 2013, fell by $306 billion, 3.8%, over the past year. Credit card debt fell by another $4 billion, 0.6%, and other consumer debt, which includes consumer finance loans such as personal loans and retail debt such as department store loans, was lower by $16 billion or 5.1%. These declines were partially offset by continued growth in auto loans and student loans. Over the past year auto loans have expanded by $64 billion, 8.5%, and student loans have grown by $80 billion or 8.8%.

Mortgage debt outstanding falls when, on net, consumers either pay off or default on their mortgage. A previous blog post illustrated that a small portion of mortgages 30-60 days late reach the default stage, but the likelihood of default becomes all but certain if a mortgage becomes 90 or more days late. As a result, determining the likelihood that a mortgage moves from the 30-60 days late stage to the 90 or more days late stage can help analysts anticipate future mortgage defaults. A declining rate of transition from 30-60 days late to 90 or more days late suggests that mortgage defaults are having a shrinking impact on the amount of mortgage debt outstanding.

Presentation1

The chart above shows that the transition rate of mortgages 30-60 days late to 90 or more days late, which averaged 14.0% between 2003 and 2006, peaked at 44.2% in the first quarter of 2009 but has since declined to 19.8%. An increase in the transition rate from 30-60 days late to 90 or more days late means that a smaller share of mortgages that are 30-60 days late either “cure” or remain in this stage. According to the chart, the percentage of mortgages remaining 30-60 days late declined between 2006 and 2009, but the “cure” rate fell even more. After dropping to 20.5% in the third quarter of 2009, the “cure rate” has since risen to 35.8%, but it is still 8.1 percentage points below its 2003-2006 average. The residual, the portion of mortgages remaining 30-60 days late, has climbed 11.5 percentage points to 44.4% and is 2.3 percentage points above its 2003-2006 average.


The Impact of Rising Interest Rates on Housing Affordability

August 5, 2013

According to Freddie Mac, the average interest rate on a 30-year fixed rate mortgage rose by 8 basis points over the week to 4.39%. Since the beginning of the year, mortgage rates have risen by about 1 percentage point and are now at a level last seen in August 2011.

The rapid rise in mortgage interest rates could affect housing affordability through higher monthly mortgage payments. However, monthly mortgage payments are not the only path by which rising interest rates can affect affordability. Homebuyers can instead decide to raise their downpayment amount in order to maintain an otherwise constant monthly payment in the face of rising rates.

Table 1 shows the impact of rising mortgage rates on downpayments for this scenario. As interest rates rise, homebuyers increase their downpayment in order to keep monthly mortgage payments roughly the same. However, the required increase in the downpayment, both in levels and as a share of the house price, declines as mortgage rates rise. If the downpayment remained at 10% even as mortgages rates rose, then the monthly mortgage payments on a $180,000 mortgage, $912 at a 4.50% mortgage rate, would rise to $994 if mortgage rates rose to 5.25% and to $1,079 if mortgage rates rose to 6.0%.

Presentation1

Alternately, homebuyers seeking to maintain affordable monthly mortgage payments may lower their bid price on a home. In aggregate, lower bids that are accepted by house sellers could depress house price growth, partly offsetting recent gains.

Table 2 assumes, as an example, that the total cost of higher mortgage rates is evenly split between a lower bid and a higher downpayment in order to maintain affordable monthly mortgage payments. the required downpayment percent rises as in Table 1 but at a slower rate.

Presentation2

This exercise illustrates that rising mortgage rates can increase monthly mortgage payments, but a larger downpayment can offset this effect. However, accumulating a larger downpayment may be difficult, especially for recent homeowners with little home equity, as well as first-time home buyers.

These numbers illustrate a large issue challenging the demand side of the housing market, which is connected to the issue of pent-up housing demand. Obtaining a mortgage to buy a home, including accumulating the necessary downpayment, is in many ways a greater hindrance for the market than recent rate increases.

Regardless, rising mortgage interest expense by homeowners is a reminder of the importance of the mortgage interest deduction  (MID) in terms of supporting housing demand. As prospective homebuyers face larger interest payments, the value of the MID increases.


House Prices See Steady Gains

July 23, 2013

Nationally, house prices continued to rise in May, contributing to the overall recovery for U.S. housing markets. According to the most recent release by the Federal Housing Finance Agency, U.S. house prices rose by 0.7% on a month-over-month seasonally adjusted basis in May. This is the sixteenth consecutive monthly increase for the House Price Index – Purchase Only. Since January 2012, house prices have risen by 10.4%.

The May increase in house prices was geographically widespread, increasing in every division of the country. As the chart below illustrates, the largest month-over-month gains took place in the Pacific and Mountain divisions, regions of the country containing states like Nevada and California that experienced the largest price declines in recent years.

Presentation1

The recovery in house prices has contributed to the ongoing repair in household balance sheets. In aggregate, rising house prices and falling mortgage debt have resulted in greater housing equity and household net worth. At the same time however, disposable personal income declined in the first quarter of 2013 due to factors such as higher payroll taxes. If disposable personal income growth continues to lag house price appreciation, then potential first-time home buyers may find their ability to buy a home more difficult.

For full histories of the FHFA US and 9 Census divisions, click here.


Soaring Revolving Credit May Not Indicate Strengthening Consumer Demand

July 9, 2013

The Federal Reserve Board reported that the total amount of consumer credit outstanding grew by a seasonally adjusted annual rate of 8.3% to $2.8 trillion in May, as debt associated with student and car loans, as well as credit card debt rose.

In April, consumer credit outstanding rose by 4.6%. The month-over-month increase in consumer credit outstanding reflected acceleration in the growth of both revolving and non-revolving credit. Revolving credit, which is largely composed of credit cards, rose by 9.3% in May after increasing by an upwardly revised rate of 1.1% in April. Meanwhile, non-revolving credit, which is largely composed of student and automobile loans, climbed 7.9%, 1.7 percentage points faster than April’s downwardly revised growth rate.

The May data represents the first time that the month-over-month rise in revolving credit has outpaced growth in non-revolving credit since May 2012.

The recent growth in revolving credit may not be confirming evidence of stronger consumer demand. On the one hand the increase in consumers’ use of credit cards may reflect growing confidence in the economic recovery. On the other hand, consumers may be increasing their use of revolving credit in order to offset lower disposable income due to factors such as higher payroll taxes.

Presentation1


Measures of Consumer Confidence Show Mixed Results but Similar Conclusions

June 28, 2013

Measures of consumer confidence were mixed in June. According to Thomson Reuters and the University of Michigan, the Consumer Sentiment Index was basically unchanged from May, falling by 0.5% on a monthly seasonally adjusted basis to 84.1. The final reading of consumer sentiment was revised up from the preliminary reading of 82.7 that was released earlier in the month. Meanwhile, the Conference Board reported that its Consumer Confidence Index rose by 9.6% on a monthly seasonally adjusted basis in April to 81.4. However, the month-over-month increase in the Conference Board’s measure of consumer confidence partly reflected a downward revision in the original May reading from 76.2 to 74.3.

Presentation1

Both measures of consumer confidence are composed of a current conditions component and an expectations component. A previous post showed that month-over-month changes between the Consumer Confidence Index and the Consumer Sentiment Index may diverge as a result of differences between the present situation component of the Consumer Confidence Index and the current conditions component of the Consumer Sentiment Index. As Chart 2 illustrates, both the present situation and the expectations components of the Conference Board’s Consumer Confidence index increased over the month, while only the expectations component of the University of Michigan’s Consumer Sentiment Index rose.

Presentation1

The opposite movement by the Consumer Confidence – Present Situation Index and the Consumer Sentiment – Current Conditions Index reflects the wedge between consumers’ view of the economy and their view of their personal finances. As chart 3 illustrates, the proportion of respondents expecting an improvement in employment and business conditions grew. However, the change consumers’ assessment of their personal financial situation and the change in consumers’ attitudes toward durable goods spending both fell.

Presentation3

The month-over-month increase in the Expectations component of both the Consumer Confidence and the Consumer Sentiment Indexes masks weakness in consumers’ views of their future personal finances. Chart 4 shows that while consumers were sanguine about their expectations of economic growth, as measured by business conditions in the Consumer Sentiment Index – Expectated Conditions and business and employment conditions in the Consumer Confidence Index – Expectations, respondent’s were less optimistic about the future of their personal finances. According to Chart 4, while a growing percentage of respondents to the University of Michigan’s survey expected business conditions to improve there was no improvement in the share of respondents that expected their personal finances to improve in a year. Similarly, the share of respondents to the Conference Board’s survey that expect business conditions and employment conditions to improve grew by 7.2 and 2.4 percentage points on net. In contrast, the percentage of respondents that expected their personal income to rise in the next 6 months rose by only 0.5 percentage points on net.

Presentation2

The University of Michigan’s Consumer Sentiment Index is composed of 3 questions on personal finances and 2 questions on general economic conditions. As a result, pessimism in respondent’s assessment of their personal finances more than offset their optimism over general economic conditions. Meanwhile, the Conference Board’s Consumer Confidence Index is composed of 1 question on personal finances and 4 questions on general economic conditions. The weakness displayed in consumers’ assessment of their personal income 6 months from now only partially offset consumers’ growing optimism of business and employment conditions, both now and in the future. These results indicate that the movement in the opposite direction that took place this month by the two measures of consumer confidence largely reflects differences in survey structure as opposed to mixed signals given by consumers. While consumers are optimistic about general economic conditions, they are less confident about an improvement in their personal finances.


Household Balance Sheets: Continuing Fiscal Cliff Impact

June 12, 2013

During the first quarter of 2013, household balance sheets improved with increases in home values and reductions in mortgage debt, thereby boosting household net worth. These are favorable improvements that will help housing demand in 2013. In particular, over the last five quarters household real estate values have risen by more than $2 trillion.

Since the end of the Great Recession such developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two quarters.

HH Balance Sheets

The graph above plots the current value of net worth to disposable personal income (NW/DPI) and the corresponding 25-year historical average (1982-2007). The dashed blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts. 

While there has been a general trend of an increasing NW/DPI ratio since early 2009, there have been ups and downs in this process due to stock market and other asset value fluctuations. As of the start of 2013, the NW/DPI measure stood at a value of 5.86, above the historical level of 5.24 and significantly higher than the cyclical low of 4.85 set during the beginning of 2009. The increase since 2009 is a reasonable measure of the improvement in household balance sheets.

However, for the last two quarters, the savings rate and the measure of disposable income experienced non-balance sheet driven movement due to the Fiscal Cliff and its resolution. In particular, the legislation staving off the Fiscal Cliff included a number of tax increases, including an end to the payroll tax cut and rate hikes at the top end of the income distribution.

In anticipation of these higher tax rates, the amount of income paid out and earned by American households jumped in the last quarter of 2012 (the uptick/peak in 2012 for the blue line below). As this accelerated income was due to a one-time cause, spending did not increase at the same rate. Thus, with a rise in income and no corresponding increase in spending, the personal savings rate increased to a revised rate of 5.3%  in the fourth quarter of 2012, marking the highest rate of savings in more than two years.

DPI and Taxes

As we forecasted in March, the data for the first quarter of 2013 showed that DPI fell at the start of year due to the accelerated income payments made at the end of 2012, as well as the enacted 2013 tax hikes. The result was that the NW/DPI measure reached its highest level since 2008. With a drop in DPI, and little change in consumption, the personal savings rate fell considerably.

It is important to note that while we’ve typically associated a rise in NW/DPI as a sign of recovering balance sheets, in this case the rise was drive by the decline in DPI. Similarly, the drop in the savings rate to 2.3% is less a sign of healing balance sheets, and more due to the timing impacts of income shifting due to the Fiscal Cliff. Data from the second and third quarter of 2013 will provide a clearer picture.

Housing Value and Debt

Nonetheless, household balance sheet repair is ongoing. Flow of Funds data from the first quarter of 2013 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 12% or $1.27 trillion. And the value of real estate owned by households has risen for the last five consecutive quarters for an increase of $2.2 trillion.


Follow

Get every new post delivered to your Inbox.

Join 7,103 other followers