The kids might not be okay.
That’s becoming a bigger worry for Wall Street investors in consumer debt, even though American families’ overall finances look good and the job market keeps climbing even though interest rates are at all-time highs.
The U.S. housing market has been strong, even though it is still mostly frozen. This has helped millions of homeowners who have very low fixed-rate debts and trillions of dollars in home equity that they can use to fix up their homes or get cash in case of an emergency.
“The real estate market has been doing amazingly well.” “It has held up very well,” said Daniel Liesener, a senior analyst at Columbia Threadneedle Investments who works with fixed income.
Renters, on the other hand, have had to deal with rising rents since the pandemic that have only recently started to level off.
Zillow Z -1.21% ZG -1.33% says that after the pandemic, income went up, but rents went up by 33.7% as well. According to Zillow, people who want to “comfortably afford the typical U.S. rent” need to make almost $82,000 a year, which is 17.6% more than they did in 2021. At the beginning of this year, the average pay in the U.S. was thought to be around $60,000.
Also, years of not building enough new homes have made it hard for first-time buyers to get a foot in the door of housing, and the stress of renting has started to show up on other parts of consumer credit.
The Columbia Threadneedle team led by Liesener is still optimistic about bonds backed by consumer debt. However, they have been keeping an eye on which borrowers are showing signs of stress. According to their data, renters with credit scores of 660 or higher have been late on their bills about 1.5 times more often this year than homeowners (see table below).
“To be honest, I’m a little surprised it isn’t higher,” he said, adding that other big monthly costs like car insurance, auto payments, and so on have also been going up because of the pandemic.
A review of about 40 million loan files by users with credit scores starting at or above the “fair” 660 range gave Columbia Threadneedle its estimate of renters who are behind on their payments.
“Golden collars”
When the 2008–2009 financial crisis hit, toxic mortgage securities came crashing down. This caused big investors to collect more information than ever before about how people’s finances were doing. The goal has been to find early signs of losses before they get out of hand.
Dave Goodson, who is in charge of securitised goods at Voya Investment Management, said, “The consumer is stretched.” As for the foreclosure crisis of the late 2000s, he said that things couldn’t be more different. That crisis started with subprime mortgages and included good borrowers as well.
In the wake of the pandemic, people took on a record amount of debt, but there haven’t been any major signs of trouble in the housing market yet. The New York Federal Reserve says that the rate of seriously delinquent auto loans, credit card debt, and other consumer credit rose in the second quarter compared to the same time last year. However, the rate of seriously delinquent mortgages stayed the same.
In the past, between 2007 and 2010, about 3.7 million homes went into default. However, Goodson pointed out that many homeowners today are stuck in “golden handcuffs” because they locked in low mortgage rates during the pandemic. They might not be facing default, but they are probably stuck in a house they don’t love and aren’t about to lose all their money.
Inflation was so high in 2022 that the Federal Reserve had to raise interest rates. This is because a fixed monthly debt has been a big safety net for families who own homes.
But for younger borrowers, the same padding looks less full. Bankrate says that the rate of property goes up a lot when a person is in their mid-30s or 40s, and it peaks at 79% for people 65 and older.
Also, a closer look at second-quarter delinquencies shows that borrowers between the ages of 18 and 29 had the highest rate of becoming seriously delinquent, though that rate was still very low compared to past norms.
Big picture
The youngest borrowers in the country are different from Timothy Chubb, chief investment officer at Girard, a Univest Wealth Division. He said that many of his baby-boomer clients have paid off their homes, don’t owe much debt, and want to spend money to enjoy life.
Chubb said that people born between 1946 and 1964 were “baby boomers” and that they were in great health. “Markets are at all-time highs, and fixed income gives them a nice rate of return with little risk.”
According to FactSet, the S&P 500 SPX -0.18% and the Dow Jones Industrial Average DJIA -0.80% both set new record highs on Friday. They have now gained about 23% and 14%, respectively, for the year. Treasury bills with short terms have yields of TMUBMUSD01M 4.772%. TMUBMUSD03M 4.625% have been going down from 5%, but on Monday, the average 10-year Treasury yield TMUBMUSD10Y 4.207% was trading close to 4.2%, which was the highest level since July. Chubb said that these things should help people spend money and the U.S. economy grow.
Goodson from Voya says that consumers have been mostly paying their bills, except in a few places where they are stressed. Lower-income and risky borrowers, as well as borrowers with debts from the end of 2021 to 2023—a time when people were saving money after the pandemic and their credit scores were temporarily boosted by government stimulus—are in the most danger. He said, “2024 is still up in the air.”
Goodson also said that youth is another area of stress because the numbers show that some millennials and Gen Z borrowed a lot to buy a car at the height of the pandemic, are now paying back their school loans, and used credit to “live life” after COVID.
The credit that Goodson saw was all different kinds. “I’m also sure that we haven’t seen weakness spread to borrowers outside of that group.”
