Consumer Credit Hits New Record With Jumps in Revolving and Non-Revolving Debt

human909

4 years ago

As somebody living in Australia this comes across as bizarre as it is the opposite here.

Here the banks will happily lend you $500k if you have and average income and if you have a partner with a 2nd income then getting a cool $1mil for a mortgage is pretty standard and unremarkable. 2% interest rates for home loans.

Car loans are at around 5%.

Meanwhile if I want a margin loan for shares which is backed by a liquid asset and can be liquidated so fairly low risk for banks and they charge 5.5% interest.

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Casual_Observer2020

4 years ago

Reply to human909

What is the typical debt to income ratio for an average house ?

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human909

4 years ago

Reply to Casual_Observer2020

In Sydney the median house price to median income is around 11x depending on you metric. In Melbourne I think it is around 8x. We are up there with some of the world’s most expensive housing;

https://sydneysentinel.com.au/2021/03/sydney-worlds-3rd-worst-city-for-housing-affordability/

While in the US it is the stock market that is bubbling away. In Australia the housing market has been a big bubble for a long time and low interest rates of COVID has pushed things up more. I can’t see it ending any time soon. But when it does end there will be pain for many. Our stock market is cheap by comparison.

That said I did buy a modest condo this year. I don’t regret the purchase. It made sense for my circumstances.

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Scooot

4 years ago

Reply to human909

“In Sydney the median house price to median income is around 11x depending on you metric. In Melbourne I think it is around 8x.”

The banks must be mad, they never learn. I don’t think it’s anything like that here in the UK, but I think there are some government schemes to help with affordability.

It’s usually unemployment leading to forced sellers and repossessions that set housing markets back. This time all the stimulus has prevented it of course.

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human909

4 years ago

Reply to Scooot

It has been working for the last 25 years why will it stop working now?

/sarcasm

As far as the banks see things is that Australians will do anything not to default on their mortgage. Which so far has been mostly proven to be correct and so the fun keeps continuing.

It is all a bit mad. But every sign points to this madness to keep continuing. Our houses have rocketed in price even further in 2021 due to the money pumping. There are many factors including lower interest rates, increased households with dual income and the good old bubble effect. But all of those factor are maxing out. You can see 1 or 2 years of a large hurrah, then a plateau and then the slow realisation that 5%-10% capital value increase on your home is no longer a reality. So I still see 3+ years in the housing boom unless we have a proper recession (which we so far have largely avoided for decades).

I’ve been a renter for most of all of my life until this year. But due to personal circumstances it simply made sense for me to buy. Apartments (condos in the US) haven’t had the same mania. I bought something modest that suits my needs and I expect no capital appreciate (though I’ll probably get some). The rest of my assets are in safe yielding equities.

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Scooot

4 years ago

Reply to human909

“As far as the banks see things is that Australians will do anything not to default on their mortgage.”

I think that’s the case here too, but unfortunately when it all goes pear shaped, there’s not much some can do. I’ve lived through one housing market collapse. I sold our second home in 1994 for a 25% loss. Although I was buying a more expensive home which was also obviously cheaper than it would’ve been, I wouldn’t have been able to had I not had enough equity in the first, as the mortgagor wouldn’t have let me sell and buy with negative equity.

Regardless, most buy in the first place to live in the property, where you are in the housing price cycle is pretty much luck of the draw, and most of the time it works out ok.

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Eddie_T

4 years ago

Reply to human909

That is very interesting.

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Eddie_T

4 years ago

I have a credit question for Mish or one of you bankers who drops in here. Or anybody who knows. Something I’d like to understand better.

I know I could walk into any car dealership in this town and walk out with a brand new high end car…..say a nice Mercedes or a BMW…..say it costs $150K. Not uncommon these days for a luxury auto. If I wanted to, I’m pretty sure I could get a loan without paying a single penny for a downpayment.

I could also get a very decent interest rate….under 3% right now.

Yet, it’s so much harder to get financing if I want to buy a piece of real estate (that isn’t a suburban house)….I’ve been looking at a building lot…. and we’ll use it for the example.

It’s a canal lot in a nice vacation home neighborhood on Corpus Christi Bay. It has septic in place, 75 feet of concrete bulkhead built on a deep canal, and half a dozen mature palm trees….driveway already built, patios too. Also worth approximately 150K. The asking price is slightly less, actually. But to borrow money for that, I’d have to put a minimum of 25% down. $35K cash up front.

And the best rate I could get would be somewhere in the 4.5% to 5.5% range.

The car will start losing value the moment I drive it away from the dealership, and at the end of a six year loan period, it will be worth next to nothing.

I can get up to maybe 15 years amortization on the lot, but……in the past ten years, real estate in the neighborhood has more than doubled, and it’s a fair assumption the next decade will see that happen again, at the least.

Coastal properties like this one are getting harder to find, and thousands of new vacation homes have been built just since Harvey in the larger general area I’m taking about. (And yes the prior house was a Harvey teardown, but all the other houses on the street survived….it’s not a red-lined neighborhood.)

What it looks like to me is that banks really conspire to keep people poor…..extending credit for things that don’t hold value, while making it very hard to borrow money to make a reasonable asset purchase that has very little risk. This has never made much sense to me.

I get the liquidity argument….but in the real world today that isn’t even a very good excuse in my opinion. You can sell anything fast now if you price it right.

Anybody want to ‘splain this to me? I’m just a working stiff who always wondered.

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Casual_Observer2020

4 years ago

Reply to Eddie_T

I think many blacks and Latinos would agree with you regarding banks conspiring to keep people poor. On the other hand I think housing is overvalued asset everywhere in the country at this point. The reliance on debt by the housing market is as high as ever. We are in the final innings just before a massive credit contraction. In some ways, I think even those with great credit can’t get the interest rates they did a few years ago. My credit score is still around 800 but interest on a new car is now 2-3% when in 2015 it was 0%. There are small signs like this everywhere in the credit markets. Finally, I think housing is going to be a problem when one or two insurers go bankrupt because of the effects of climate change that their risk portfolio didn’t account for. Then insurers will start using climate change as an out not to pay insurance (if they already haven’t) when cities and some states go up in smoke, flood or take your pick. Flood, earthquake and insurance prices have to go up at some point. Most of the banking system operates on archaic state legislation from the 1800s.

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Mish

4 years ago

Reply to Eddie_T

Banks are largely out of the mortgage and land business. I think there were new capitalization rule by the Fed and perhaps new rules by Congress. Perhaps it’s just fear of a repeat or all three. But they are largely out of the business and/or refuse to compete.

Fannie and Freddie have taken over mortgages totally. And Blackrock is buying homes, or land suited for apartment complexes. That leaves vacant single land for whom?

No conspiracy, but it leaves vacant land for people with a brain, like you, provided they have cash. The deals you get and you seem smart enough to find them, are because everyone else abandoned the market.

Not in that business but take advantage and Be grateful!

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Doug78

4 years ago

Reply to Eddie_T

It comes down to collateral. For the bank a house is better collateral because if repossessed it can be rented out and produce a revenue stream. The piece of land you are looking at if repossessed will not produce a revenue stream. Therefore for the bank it is a riskier asset and deserves a higher interest rate.

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human909

4 years ago

Reply to Eddie_T

As somebody living in Australia this comes across as bizarre as it is the opposite here.

Here the banks will happily lend you $500k if you have and average income and if you have a partner with a 2nd income then getting a cool $1mil for a mortgage is pretty standard and unremarkable. 2% interest rates for home loans.

Car loans are at around 5%.

Meanwhile if I want a margin loan for shares which is backed by a liquid asset and can be liquidated so fairly low risk for banks and they charge 5.5% interest.

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Eddie_T

4 years ago

Reply to Eddie_T

Thanks to all of you for your comments.

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anoop

4 years ago

there will be no more financial crises in our lifetime.

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amigator

4 years ago

Reply to anoop

you are right all future crises will be classified as Climate or Health crises the financial part has already been addressed.

I am for a new holiday. Dumbteen day it will be the first Tuesday in December that falls on a teen day and everyone that voted or didn’t vote can celebrate for their candidate that won and how their candidate is going to work hard to get us out of these messes!

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AWC

4 years ago

So, if wages remain stagnant, and consumer prices keep rising, at what point do prices reach unaffordable levels, and consumers no longer support them? Maybe when Federal unemployment bennies stop? Or when eviction moratoriums end? Or when those charge card lines of credit are reduced? How ‘bout when all three cascade down on the consumer at the same time?

Yeah, thought so. Obviously, we’re gonna need a much more virulent strain of fright emanating from TPTB, to trigger $trillions more in stimmy’s to keep this charade going.

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Six000mileyear

4 years ago

Reply to AWC

I think we’re starting to see unaffordable price levels as indicated by a decrease in revolving credit. Revolving credit is generally for discretionary spending. A tell-tale sign of a credit top would be an increase in dollar volume of houses sold while the number of units decrease. (This happens in equity markets as well)

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Casual_Observer2020

4 years ago

OT: Both major hospital ICUs are full in my area. Please get the vaccine if you haven’t. If you only got the first shot of the MRNA vaccine, please get the second. This is a PSA for the surgeons who now have to cancel surgeries here and elsewhere because not enough people got vaccinated and now the hospitals are full again.

https://www.yahoo.com/news/virginia-man-put-off-getting-112154286.html

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Eddie_T

4 years ago

I don’t think it’s any mystery that people cash in on home equity when the average CC rate is 16.22% APR…and the average rate for new cards now is 23.69% APR. Even Americans can figure out, with the prime rate at 3.25%, that the public is getting screwed beyond belief on credit cards.

https://www.creditcards.com/credit-card-news/rate-report/

It makes sense to borrow long on mortgages at a sweet 2.75%. Hell yeah, buy a house in a good growth area with that kind of borrowed money if you don’t have one……and if you do, buy a couple more if they flow cash….as long as you have the reserves to ride out rough times ahead.

My guess though is that most of the new consumer debt is “oppressive debt”…..meaning it’s spent and gone, with nothing added to the borrower’s asset side. That is terrible, but not surprising.

I wish we could see how many rent defaulters used their stimulus money to buy a really nice car. I worked on a kid this last week who was on Medicaid…couldn’t help but notice, arriving early for work, they were already parked out front. The parent was driving a late model Suburban with $4-5K worth of fancy wheel and tires……this is as common as mud where I work.. And subprime auto loan rates are above 20% APR.

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Casual_Observer2020

4 years ago

Reply to Eddie_T

4-5k isn’t much if you can afford a Suburban.

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Eddie_T

4 years ago

Reply to Casual_Observer2020

Let’s assume somebody bought 5k worth of tires and wheels on a credit card with 23.69% interest. The minimum monthly payment might be $150…..but let’s assume the buyer is able and willing to pay $200/month……and never misses a payment.

At the end of five years that $5K debt will have grown to $8945 and change. The longer he pays, the worse it gets.

https://www.dallasfed.org/educate/calculators/open-calc.cfm

Still think 5K isn’t much?

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Casual_Observer2020

4 years ago

Reply to Eddie_T

You are assuming he didn’t have the money because his kid was on Medicaid. I know small business owners who drive Lamborghinis, Ferraris and Porsches in my neighborhood who are on public health care. It is all about how you shield assets from qualifying for programs.

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Eddie_T

4 years ago

Reply to Casual_Observer2020

This guy probably doesn’t make enough money from his job to pay attention, but you make a fair point. In this state you can’t get Medicaid at all for a healthy kid with no disabilities….. if there are two parents working….but parenthood seems to be easy enough to shield from the government too.

And we have a healthy underground economy.

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Call_Me

4 years ago

Reply to Eddie_T

Unfortunately a quick search didn’t yield the clip, but the text still gets the point across-

https://www.quotes.net/mquote/923321

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Eddie_T

4 years ago

Reply to Call_Me

Hehehe. Love it.

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RonJ

4 years ago

That top chart is working on some nice parabolic curves.

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Consumer Credit Hits New Record With Jumps in Revolving and Non-Revolving Debt

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