NEW YORK - The record percentage of consumers behind on their
credit-card payments could be the ugly result of a weakening housing
market -- and an ominous sign of greater credit pain to come, economists
said Wednesday.
But some analysts suggested that the improving labor market would ease
the sting of a softer housing market and help stop the bleeding in
consumer balance sheets.
The American Bankers Association (ABA) reported Tuesday that 4.09
percent of all credit-card accounts were delinquent in the third
quarter, the highest rate on record, and said the weak job market was
probably to blame.
But Morgan Stanley senior economist Bill Sullivan suggested there may be
another culprit -- the end of the mortgage refinancing boom.
"It is no coincidence that households found it more difficult to
maintain current payment schedules just as the volume of refinancing
activity began to dry up as the second half of the calendar year got
underway," Sullivan wrote in a research note Wednesday.
The refinancing boom, triggered as mortgage rates fell to the lowest
level in a generation, offered homeowners a ready source of cash. Most
consumers plowed that cash back into their houses, for new washers and
dryers, carpeting or to build that new deck.
But others used it simply to pay bills, including their credit-card
bills. Shut off the refi spigot, and you may have shut off the ability
of some cardholders to pay.
"Conceivably, as the number of households that refinanced dropped off,
the ability for consumers to enhance cash flows and service other debt
loads eroded as well, thus partially accounting for the upturn in late
payments," Sullivan wrote.
How flush consumers are has big implications for the United States,
since consumer spending fuels more than two-thirds of the economy. The
housing market helped keep consumers spending despite a recession,
rising unemployment, terror attacks, two wars and the three-year bear
market in stocks.
Since the refi boom peaked in May, the average rate on the thirty-year,
fixed-rate mortgage has risen, but only by 0.6 percentage points, and is
still well below 6 percent -- a historically low level.
Despite such a small gain in rates, however, many new mortgage borrowers
have jumped to adjustable-rate mortgages (ARMs) -- possibly a sign that
many of the borrowers during the housing boom had less-than-perfect
credit.
"In our judgment, this pattern could be another exhibition of household
balance sheet stress, as the shift would seem to suggest that a
relatively small rise in 30-year rates apparently excludes a significant
number of prospective home buyers from qualifying for mortgage credit,"
Sullivan wrote.
ARMs can sometimes be easier to get, but their monthly payments can jump
after the first year, and those payments could rise further as interest
rates rise -- another way the expected rise in rates and slowdown in the
housing market could pinch consumers' wallets this year.
A housing slowdown could also lead to more mortgage foreclosures,
according to Robert Brusca, chief economist at Native American
Securities in New York.
"Foreclosures have been running low nationally because home prices have
been up -- anybody who couldn't pay their mortgage could simply sell
their house and pay off the mortgage balance with their equity," Brusca
said. "If you don't have any equity, you can't forestall foreclosure."
Brusca said the end of the refi boom doesn't totally explain the jump in
credit-card delinquencies in the third quarter, but he called tying the
two issues together "the right thing to do."
"Should housing get into trouble, it could expose debt problems," he
said.
ABA senior economist Keith Leggett acknowledged that the end of the refi
boom had cut off one source of cash for consumers to pay off credit
cards, exposing them to lingering weakness in the labor market.
Since the last recession officially ended in November 2001, employers
have cut 800,000 more jobs, and about 2.3 million jobs have been lost
since February 2001, just before the recession began -- the longest such
stretch of labor weakness in the United States since World War II.
But the job market has shown signs of life in recent months, and many
economists hope that improvement will gather strength this year. If it
does, said the ABA's Leggett, consumers will be able to bear the brunt
of any housing slowdown -- eventually.
"Even if there's a pick-up today in job creation, we should not see a
real improvement in delinquencies until later this year -- there's about
a six- to nine-month lag," Leggett said. "But I clearly believe the
employment market plays a key factor in delinquencies."
This article courtesy of CNN.
Securitas