Are Consumers Paying Down Debt? | John Burns Real Estate Consulting

Are Consumers Paying Down Debt?


Consumer borrowing declined for the first time in more than 10 years, which is a possible indicator that they are reining in their spending and getting their own personal balance sheets in order. As noted by the Federal Reserve this week, outstanding revolving (credit card) and non-revolving (auto loans, student loans, etc.) credit declined in August, resulting in the first month-over-month drop in total credit outstanding since January 1998. Consumers also pulled back on borrowing in the latter half of 1991. While the recent fluctuations in the stock market is certainly taking its toll on consumers’ net worth, the decline in borrowing shows that perhaps they are watching their wallets more closely.

Anecdotally, we understand from an Equifax analyst that consumers were using their 2008 tax rebate checks to pay down debt, and witnessed a sharp increase in the personal savings rate during that time as well.

Economic Growth…………………………………………………………………..D+
The economic growth indicators continued to deteriorate this month. The employment sector weakened further, as companies shed jobs at the fastest pace in more than 5 years. This marks the fourth consecutive month of year-over-year losses in non-farm payroll jobs. The unemployment rate remained flat at its 5-year high of 6.1%, but mass layoff events are increasing. Retailers are suffering as consumers cut back on spending, and retail sales growth has slowed to just 1.6% year-over-year. Real GDP growth in the second quarter was revised down to an annual rate of 2.8%, from 3.3% in the preliminary report, but productivity rose significantly to an annual rate of 4.3%. Inflation fell slightly this month, with the Full CPI now at 5.4% and the Core CPI (all items less food and energy) flat at 2.5%.

Leading Indicators…………………………………………………………………D
The leading indicators declined further, hinting at prolonged economic weakness in the near future. Stocks plummeted in September in the wake of additional bank failures and panic about the efficacy of the federal bailouts, resulting in year-over-year declines of 22-24% through September for the major indices we track. The stock market has continued to weaken significantly in early October, with the Dow Jones falling below 9,000 points, the lowest level in 5 years. Home builder stocks had been improving from mid-July lows, but have worsened in recent weeks. While oil prices have been on a downward trajectory since June, the per-barrel cost remains above the $100 mark. The Leading Economic Index dropped further into negative territory, indicating that the economic slowdown will likely worsen in the near future. The Purchasing Managers Index fell to its lowest level in nearly 7 years, suggesting further contraction in the manufacturing sector.

Mortgage Rates……………………………………………………………………B+
Mortgage rates inched back to higher levels by September month-end after plunging in the wake of the government rescue of Fannie Mae and Freddie Mac. By the end of September, the 30-year fixed rate had reached 6.09%, while the 1-year adjustable rate stood at 5.16%. As a result of continued weakening in the economy and the growing financial crisis, the Federal Reserve implemented and emergency rate cut of half a percentage point for the fed funds rate, which reduced the target rate to 1.5%. The Mortgage Bankers Association reported that the share of ARM applications was at 4% in the last week of September; by comparison, ARM applications comprised more than 25% of total applications 2 years prior.

Consumer Behavior…………………………………………………………………D+
While several components of consumer behavior improved in the last month, the overall sector remains quite weak compared to history. Consumer confidence rose again to 59.8 for the month, but is nearly half of the confidence level of early 2007. Both the University of Michigan’s Consumer Sentiment Index and the Consumer Comfort Index also rose in September, but remain below their respective historical averages as well. While the dollar volume of equity per owned home is quite high, the debt percentage of home value (LTV) is currently at its worst level in history. Total outstanding consumer credit decreased this month for the first time in more than 10 years, and the revolving consumer credit component also decreased, as economic conditions take their toll on household budgets.

Existing Home Market………………………………………………………………D+
The existing home market continues to weaken, again reporting mostly declines for the month. The annualized existing home sales volume fell to 4.9 million transactions in August, and is down nearly 11% year-over-year, according to the National Association of Realtors (NAR). The volume of pending home sales unexpectedly increased in August, and is now 9% higher than one year ago. The supply of unsold homes shrank slightly, but remains high at 10.4 months of inventory. The median price in the resale market has fallen nearly 10% year-over-year to $201,900, according to NAR, while the Case-Shiller index shows an annual decline in paired sales of more than 15%.

New Home Market……………………………………………………………………F
The new home market fundamentals were mixed this month. Builder confidence rose due to higher expectations for sales in the next 6 months, but overall builder confidence remains barely above its historical low. The annualized sales volume decreased to 460,000 transactions, which is the lowest since January 1991 and represents a 35% decline year-over-year. According to the Census Bureau, the median new home price has declined 6% year-over-year. Although the absolute volume of unsold new homes continues to decline, falling sales activity has pushed the months of supply to nearly 11 months.

Housing Supply…………………………………………………………………….F
The supply of new housing diminished across the board, from permits to starts to completions, pushing housing supply to extremely low levels. The annual volume of new home completions fell to 961,000 units, dropping below 1 million units for the first time since September 1982. Both single-family and multifamily starts declined, pushing total starts down to 895,000 units. Single-family and multifamily permits also declined, resulting in a 36% year-over-year drop in total permit activity.

U.S. HOUSING MARKET STATISTICS
Data Current Through September 30, 2008
Grade*
Overall Grade
D+
Statistic
Grade
D+
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 2.8% C
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -599,000 D+
Employment Growth Rate
– Non-ag Payroll, NSA -0.4% D+
Unemployment Rate 6.1% C
Mass Layoff Events, SA (YOY % Change) 44.3% D+
Productivity 4.3% C
Retail Sales 1.6% D
Inflation
Core CPI 2.5% B
Full CPI 5.4% C
Personal Income Growth, nominal 4.6% D
Federal Deficit (last 12 mos., $mil curr.) -$375,608 D
Total Households 111,228,000
Statistic
Grade
D
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) -2.1% C-
ECRI Leading Index -13.3% D-
Manpower Net Employment Outlook 9% F
Corporate Profit Growth (pre-tax) -8.3% D
Residential Investment as % of GDP (nominal) 3.5% F
Interest Rate Spread
10-year Treasury 3.84%
2-year Treasury 2.11%
Interest Rate Spread 1.73% B-
Stock Market (Return over last 12 months)
Dow Jones -22% D+
S&P 500 -24% D-
NASDAQ -23% D
Wilshire 5000 -23% F
S&P Super Homebuilding -6% D+
Crude Oil Price (Current $) $103.90 D-
ISM Manufacturing Index 43.5 D+
ISM Non-Manufacturing Business Activity Index 52.1 D+
Statistic
Grade
B+
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Mortgage Rates, fixed 6.09% A-
Mortgage Rates, adjustable 5.16% B
Fixed/Adjustable Spread 0.93% D
Fixed/10-year Spread 2.25% C+
Fed Funds Rate 2.00%
Percentage of Adjust. Loans 4.0% A
Subprime Index (ABX.HE.BBB-.06-02) 5.4 F
Statistic
Grade
D+
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 59.8 D-
Consumer Sentiment Index 70.3 D
Consumer Comfort Index -42.5 F
Equity/Owned Home (Current $) $116,087 B-
Debt % in Home (LTV) 54.8% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Revolving Cons. Credit per Household $8,159
– Growth Rate 4.6% B
Statistic
Grade
D+
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -15.4% F
NAR Single-Family Median Home Price $201,900
NAR Single-Family Annual Price Appreciation -9.7% F
Freddie Mac Annual Price Appreciation -2.9% F
Annual Sales Volume, SA 4,910,000 B-
Months Supply of Unsold Homes, SA 10.4 D
Purchase Mort. App. Index, SA 342.2 B-
Pending Home Sales Index, SA 93.4 D
Homeownership Rate 68.1% A-
Statistic
Grade
F
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 18 F
Multifamily Condo Market Index 10 F
Median Price, NSA $221,900
Annual Appreciation Rate -6.2% D
Constant Quality Price Index (YOY % Change) -3.5% D-
Sales Volume, SA 460,000 D-
Months Supply of Unsold Homes, SA 10.9 F
Months of Homes Completed, SA 4.5 F
Months of Homes Under Const., SA 4.9 D
Months of Homes Not Started, SA 1.6 D-
Statistic
Grade
F
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 961,000 F
Single-Family Starts, SA 630,000 F
Multifamily Starts, SA 265,000 D
Total Starts, SA 895,000 F
Single-Family Permits, SA 554,000 F
Multifamily Permits, SA 300,000 D
Total Permits, SA 854,000 F
Manuf. Housing Placements, SA 76,000 F
Total Supply, SA 930,000 F
Total Housing Stock 129,871,000
Homeowner Vacancy Rate 2.8% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are “A” scores, the average is a “C”, and the worst 15% ever are “F” scores, with distributions throughout.

 


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