Credit Card Debt Soars as House Prices Plunge

The credit crunch is spreading to other areas. An earlier article I posted showed that the credit crunch was building in the car loans sector as well. The number of people unable to pay of car or credit card loans is increasing placing more stress on lenders. If there is a slowdown in the economy resulting in more job losses evne more people will lag behind in payments..

Credit Card Debt Soars as House Prices Plunge
By Dean Baker
The Center for Economic and Policy Research

Wednesday 09 January 2008

"The current rate of house price decline will destroy $2.2 trillion of wealth this year."
The Federal Reserve Board reported yesterday that credit card debt rose at an 11.3 percent annual rate in November after rising at an 8.5 percent rate in October. By comparison, credit card debt rose at a rate between 2 percent and 4 percent from 2003 to 2005.

The explanation for this surge in credit card debt is that millions of homeowners are losing the ability to borrow against their home. In the last Flow of Funds release, the Fed reported that the ratio of homeowners' equity to value stood at just 50.4 percent, down from 54.2 percent at the end of 2005, and 57.3 percent at the end of 2001. The ratio will almost certainly cross below 50 percent for the first time in history when the fourth quarter data is reported. This is a remarkably rapid decline, especially since the soaring home prices of recent years translated dollar for dollar into additional equity.

This aggregate number conceals vast differences among homeowners. More than one-third of homeowners have completely paid off their mortgages and many others are close to having them paid off. This means that a large number of homeowners have little or no equity in their home. These people are now running up credit card debt at near record rates. Of course, credit card debt cannot offset the ability to borrow against home equity for long. Total outstanding credit debt is less than $940 billion; mortgage debt was increasing at a $730 billion annual rate in the third quarter. Millions of households will soon have little choice but to sharply curtail their consumption.

The latest Case-Shiller indexes, which received little attention because they were released on December 26th, showed that house prices in the aggregate index were dropping at an annual rate of 11.7 percent in the three months from July to October. At this pace, households will lose more than $2.2 trillion in housing wealth over the next year. Some of the really big losers in the latest data were Las Vegas, where house prices were falling at an 18.9 percent annual rate over the last three months, San Diego, where they declined at a 20.3 percent rate, and Miami where they dropped at a 22.0 percent rate.

Many homeowners in these formerly hot markets put little or nothing down when they purchased homes in the last two or three years. As a result, a large percentage of recent homebuyers will soon find themselves with negative equity. This is the reason that the foreclosure crisis is spreading from the subprime segment of the mortgage market to the Alt-A and prime segment. Homeowners who find themselves owing more than the value of their home have enormous incentive to default.

The pending home sales data for November are somewhat better than most analysts had expected. While they are down slightly from the October levels, the latter were revised up to show a gain of 3.7 percent from September instead of 0.6 percent. The improvement from the August-September trough is concentrated in the West, where sales have risen by almost 8 percent from the lows hit in the summer. This probably is due more to the extraordinary weakness of the summer sales levels (down almost 40 percent from 2005) than to any real upturn in the market.


The mortgage applications index continues to give erratic readings, jumping 32 percent from last week's seasonally adjusted measure. The recent mortgage application data is hard to interpret for two reasons. First, the subprime segment of the mortgage market is underrepresented in the Mortgage Bankers Association (MBA), which constructs the index. This means that the index will not fully capture some of the falloff in subprime loans. Also, as borrowers switch from defunct subprime lenders to MBA members, it will appear in the index as an increase in lending. The other problem with this data is that a far higher portion of applications are turned down now that a year ago. Even with these factors inflating the index, the four-week average for the purchase index was just 397.9. It had been over 500 at its peaks in 2005.

Credit Card Debt Ready to Blow?

Perhaps this is a bit paranoid but it does seem credit card debt is growing quite large as statistics show and the drying up of other types of credit may increase the demand.


www.baltimoresun.com/business/bal-bz.hancock10oct10001523,0,987590.column

baltimoresun.com
Credit card debt is ready to blow
Jay Hancock

October 10, 2007




After every financial crisis over the past 10 years, the Federal Reserve has cut interest rates and pumped money into the economy. Each rescue solved the problem - and created a new one.

The next bomb from this chain reaction of bailouts and blowups will be credit-card debt. Hardly anybody is talking about it yet, but banks and consumers are laying the ground for a wave of credit-card defaults, bankruptcies and asset write-offs for 2009 or so.

Regulators and investors have discouraged excessive mortgage lending, so banks are turning to credit cards as the next growth business. They're starting to raise credit limits, lower lending standards and increase recruitment. And now that they can't borrow against homes so easily, consumers are borrowing more against plastic - even to meet higher, adjustable mortgage obligations that they can't handle from their income.

This can end only one way. The only question is how bad it will be.

The percentage of banks tightening credit-card lending standards is hovering near its lowest levels in a decade, according to a Federal Reserve survey.

Junk-mail credit-card solicitations jumped late last year, although they're still below the levels of 2005, according to the Tower Group, a financial services research firm. But more importantly, the percentage of people responding to credit-card come-ons has risen steadily and nearly tripled since mid-2005.

"It doesn't mean that banks are giving the store away, but they've eased their lending standards to be able to grab [market] share" in credit cards, says Dennis C. Moroney, a senior analyst at Tower.

Increasing market share is often banker-ese for "making lots of loans that won't get paid back."

Here's Countrywide Financial boss Angelo Mozilo talking to Wall Street analysts three years ago: "We have a strong focus on growing market share and have set a very ambitious goal of attaining 30 percent market share by 2008." These days, thanks to the dud mortgages Countrywide issued, it has a strong focus on trying to avoid bankruptcy.

When mortgages and home-equity loans were all the rage, consumers had no need to crank up credit-card balances and bank salesmen had no need to push plastic.

But cards are now the bank growth product and consumer lender of last resort. Some households are almost certainly meeting mortgage obligations by borrowing against their credit cards, although it's impossible to tell how many, says banking analyst Bert Ely of Ely & Co. Millions of mortgages issued at low, teaser rates will reset over the next two years, adding to pressure on household finances.

"I wonder how many people are out there right now getting new credit cards and just preparing for that day," says Ely.

As growth in home equity balances has fallen almost to zero, credit-card balances have increased at a 17 percent annual rate over the past six months, according to a report by Merrill Lynch economist David Rosenberg. And the trend, he writes, "is clearly accelerating." A year ago card balances were shrinking.

Card defaults are up, too. They are nowhere near the levels reached after the tech-stock meltdown and the 2001 terrorist attacks, but they will grow. The average American has seven credit cards in his wallet. Americans owe more than $500 billion on cards already. Household debt levels and debt payments are near all-time highs. And the economy is in danger of entering recession.

If banks are swallowing hard before issuing asset-backed mortgage loans these days, should they really be increasing unsecured card debt to the same people? Especially since credit-card interest can be three times as high as mortgage rates and isn't tax-deductible?

No - but the Fed is creating money, regulators eyes' are off the ball and the dough will flow along the line of least resistance.

I'm not saying credit-card pain will be as bad as previous financial blowups. I'm not even saying the Fed shouldn't lay on some lubrication.

I am saying to expect a new chapter in the chain reaction of bubbles that began 10 years ago. The Fed cut rates to fix the emerging-markets stock collapse in 1997 and 1998, and we got the Nasdaq craze. It cut rates to fix the Nasdaq crash and we got the housing bubble. Now it's cutting rates to fix the housing slump.

Easy card deals will soon be everywhere you want to be. It may be good news for retailers temporarily. But look out below.



jay.hancock@baltsun.com

Copyright © 2007, The Baltimore Sun