Thursday, June 21, 2012

Living the undead lifestyle - pay as you go

I am not sure what sequence I will wind up placing the variety of posts I am working on.  If it were not for a concern for length, I could tack this one onto the end of the baby boomer retirement plight post.

The following is an interview column that I picked up from the Los Angelos Times real estate section.  There are two (two) relevant issues of note.

The person answering the questions is Ezra Becker, vice president of research and consulting at TransUnion, and the tradition hierarchy they are discussing is the fact that people used to pay their mortgage first, the car second, than other bills, and then if they had them, credit cards last.
Paying mortgage isn't a top priority in tough times, research shows
Mary Umberger, Los Angelas TImes, 10 June 2012 (hat tip: NC

What did you study to conclude that there's been a change in attitudes about this hierarchy?
One of the things we noticed at the beginning of the recession was that delinquency rates on mortgages were skyrocketing, but they were controlled in the credit card space. We knew this was weird. If the traditional payment hierarchy were holding true, credit card delinquencies also would have skyrocketed too.
So we studied the data in 2010 and later updated it, concluding that credit cards had, indeed, become the top priority. But we didn't include car payments in those studies, so we did a second update, studying 4 million people who had a mortgage and at least one credit card account and one auto loan.
We found that in 2011, consumers were likely to pay their auto loans before their credit cards, and then their mortgages. It was true in all 50 states and the District of Columbia and across different risk tiers, such as prime versus subprime. It was illuminating to see that credit cards aren't the most important credit to people; it's auto loans.

For consumers who had all three types of credit in 2011, when they became delinquent in any of those categories, 9.5% who were delinquent on an auto loan were current on their credit cards and mortgages. And 17.3% who were delinquent on their credit cards were still up to date on their mortgages and car loans. But a far larger number, 39.1%, who were delinquent on their mortgages stayed current on their credit cards and car loans.

They note that cars are an important item because so many people now need them to get to work, or to find new work: fair enough.   Then we get to the kicker:
Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can't use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you.
But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren't involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you're looking at 10 to 20 months before you'll be evicted. 
And you have to look at the idea of equity. In the "traditional" hierarchy, you'd say that people valued their homes above all else. But this is slightly inaccurate: They valued their equity above all else. When equity evaporates for consumers, the home is not so important.
And here is the bonus kicker.  The second point I underlined earlier

But we think it's going to be a few years yet. Our internal forecast for housing is that it won't be fully stabilized until 2017, barring a major change in the environment. It's going to be another five years before we'll revert to the traditional format.
So what we have is the discussion of the real, current trend that people are so poorly off that they are using paying the minimum into their credit card (likely to keep food on the table), and that they are so tapped out on assets, that they really have no assets worth protecting.

And...and, this is the new normal.  A forecast - a refreshingly honest one - that says we are not likely to see "stability" , little less recovery, for 5-years, may as well be saying that we may well never see a change.  Five-year economic plans are notoriously unreliable.  But you like to see a better base-line.  A five year recovery pretty much says that there is no engine to our economy, and that the debt bubble will only settle out through slow inflation - or to use that 1970s term: stagflation.


PioneerPreppy said...

I think there was some herd mentality working there as well. Since so many were letting their mortgages go they figured why not? They had extra money to spend and were in the same boat as so many others and all.

Anonymous said...

I'm thinking stagflation, too. And even more .gov control/involvement in everything.


russell1200 said...

PP: I agree with you in part. But I think the another big factor is that credit cards are what people buy food with. That was fairly unusual not all that long ago.

GK: It's a race to see which collapses fastest - value of assets or value of money. The government (not without reason) has propped up the value of investment instruments. If they can turn this cloud money into items of real value you will get stagflation.