Consumer Credit Trends: Mid-range Consumer not Buying Homes; Tired High-End Consumer

Dan Oppenheim
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Dan Oppenheim , CFA

(415) 889-5617

doppenheim@ssrllc.com

February 15th 2019

Consumer Credit Trends: Mid-range Consumer not Buying Homes; Tired High-End Consumer

  • High consumer debt increases the importance of affordability. Our analysis of consumer debt levels from the NY Fed’s Quarterly Report on Household Debt and Credit suggests that the high consumer debt – especially auto and student loans – makes housing affordability even more important and may constrain homeownership levels over time. In addition, mortgage origination trends suggest that many consumers who should be buying aren’t, as consumers with generally healthy credit scores are far less likely to purchase than would be typical. We continue to have a positive view on housing as the recent decline in mortgage rates has sufficiently aided affordability to spur more activity, but view these high debt levels as a limit on home sales over time.
  • Where have the homebuyers with 720-759 credit scores gone? The share of mortgage origination volume to borrowers with credit scores of 720-759 fell to a low of 15.4% in 4Q18, well below the 26.4% long-term average from 2003-2018. There’s been a declining trend over the past five years (with the 720-759 share falling from 29.8% in 4Q13), with a corresponding increasing share for those with credit scores of 760+ (up to 57.9% in 4Q18 from 47.9% in 4Q13). We believe that this shift is likely due primarily to stretched affordability limiting the ability of these buyers in the 720-759 range to purchase homes and take on mortgage debt along with a slight upward drift in credit scores during the economic expansion.
  • Top-tier consumers may be tiring. In addition to the rising share of mortgage originations, consumers with 760+ credit scores have also taken on a higher share of auto loans, with 33% of 4Q18 auto loan originations going to borrowers with credit scores of 760+. Typically, this top-tier consumer only has such a high share of auto loan originations during downturns, when credit is less available for the low end. The median credit score for auto loan originated in 4Q18 increased to 710 (up from 704 in 3Q18), which on the surface might appear to be better or tighter lending, but we believe reflects the greater appetite for auto loans from consumers with high credit scores.
  • Rising auto loan delinquencies; student loan delinquencies remain elevated. Auto loans have continued to worsen, with the 90+ day delinquency rate increasing 42 basis points year/year to 4.47% (up 20 basis points sequentially) and well above levels seen aside from during economic downturns. The continued growth in originations of auto loans and deteriorating performance suggest trouble ahead, especially if the economy slows. We would not be surprised to see further slowing in auto sales after January’s 5.1% sequential decline. For student loans, the 90+ day delinquency rate on student loans remained near its peak at 11.42% (up 48 basis points year/year, but down 11 basis points sequentially).
  • Non-housing debt continues to climb, leading overall debt to set another peak level. Non-housing debt (total consumer debt less mortgages and home equity loans) reached $4.01 trillion (a record) in 4Q18, up 4.9% year/year, and continuing the upward trend started in 2010. The key drivers were a 5.7% increase in student loans and a 4.6% in auto loans. Housing debt (mortgages and home equity loans) increased 2.3% year/year in 4Q18, and has increased only 13.8% from its 2Q13 low, whereas non-housing consumer debt increased 44.6% over the same time period, primary due to the growth in auto and student loans. Tight mortgage lending, stretched housing affordability in some markets, and the decreased consumer borrowing capacity due to other debt has likely led to this slower growth in housing debt. Overall consumer debt reached a peak of $13.54 trillion, up 3.0% year/year and 6.9% above the prior cycle peak.
Exhibit 1: SSR’s Preferences Among Housing-Related Sectors
Source: SSR analysis

Consumer Credit Trends: Mid-range Consumer not Buying Homes; Tired High-End Consumer

High consumer debt increases the importance of affordability. Our analysis of consumer debt levels suggests that the high consumer debt – especially auto and student loans – makes housing affordability even more important and may constrain homeownership levels over time. In addition, mortgage origination trends suggest that many consumers who should be buying aren’t, as consumers with generally healthy credit scores are far less likely to purchase than would be typical. We continue to have a positive view on housing as the recent decline in mortgage rates has sufficiently aided affordability to spur more activity, but view these high debt levels as a limit on home sales over time.

Where have the homebuyers with 720-759 credit scores gone? The share of mortgage origination volume to borrowers with credit scores of 720-759 fell to a record low of 15.4% in 4Q18, well below the 26.4% long-term average. The share of originations to buyers in this credit score range has declined over the past five years (with this share falling from 29.8% in 4Q13), with a corresponding increasing share for those with credit scores 760+ (up to 57.9% in 4Q18 from 47.9% in 4Q13). We believe that this shift is likely due primarily to stretched affordability limiting the ability of these buyers in the 720-759 range to purchase homes and take on mortgage debt along with a slight upward drift in credit scores during the economic expansion (so that borrowers who had been in the 720-759 range moved up into the 760+ range during this time).

Exhibit 2: Borrowers with 720-759 credit scores have largely been absent in recent years
Source: New York Fed Consumer Credit Panel/Equifax

Top-tier consumers may be tiring. In addition to the rising share of mortgage originations, consumers with 760+ credit scores have also taken on a higher share of auto loans, with 33% of 4Q18 auto loan originations going to borrowers with credit scores of 760+. Typically, this top-tier consumer only has such a high share of auto loan originations during downturns, when credit is less available for the low end. The median credit score for auto loan originated in 4Q18 increased to 710 (up from 704 in 3Q18), which on the surface might appear to be better or tighter lending, but we believe reflects the greater appetite for auto loans from consumers with high credit scores.

Exhibit 3: Auto financing offers have spurred demand and loans to high credit borrowers, but likely peaking
Source: New York Fed Consumer Credit Panel/Equifax

Rising auto loan delinquencies; student loan delinquencies remain elevated. Auto loans have continued to worsen, with the 90+ day delinquency rate increasing 42 basis points year/year to 4.47% (up 20 basis points sequentially) and well above levels seen aside from during economic downturns. The continued growth in originations of auto loans and deteriorating performance suggest trouble ahead, especially if the economy slows. We would not be surprised to see further slowing in auto sales after January’s 5.1% sequential decline, given that an easing of credit may be needed to boost sales, but is unlikely given the eroding loan performance. For student loans, the 90+ day delinquency rate on student loans remained near its peak at 11.42% (up 48 basis points year/year, but down 11 basis points sequentially).

Exhibit 4: Rising auto loan origination volume plus rising delinquencies = potential trouble ahead
Source: New York Fed Consumer Credit Panel/Equifax

Non-housing debt continues to climb, leading overall debt to set another peak level. Non-housing debt (total consumer debt less mortgages and home equity loans) reached $4.01 trillion (a record) in 4Q18, up 4.9% year/year, and continuing the upward trend started in 2010. The key drivers were a 5.7% increase in student loans and a 4.6% in auto loans. Housing debt (mortgages and home equity loans) increased 2.3% year/year in 4Q18, and has increased only 13.8% from its 2Q13 low, whereas non-housing consumer debt has increased 44.6% over the same time period, primary due to the growth in auto and student loans. Tight mortgage lending, stretched housing affordability in some markets, and the decreased consumer borrowing capacity due to other debt has likely led to this slower growth in housing debt. Overall consumer debt reached a peak of $13.54 trillion, up 3.0% year/year and 6.9% above the prior cycle peak.

Exhibit 5: Rising levels of non-housing debt, driven by auto and student loans
Source: New York Fed Consumer Credit Panel/Equifax

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