When trying to gauge the overall economic strength of the US, most talking heads mention a few macroeconomic indicators. The most popular indicators are the Shiller PE ratio, the yield curve, and unemployment rates. However, there’s another one I would like to keep an eye on: the percentage of delinquent payments surrounding credit cards, auto loans, and mortgages.
When families start to feel squeezed financially, they miss their credit card payments. If things get worse, they miss their auto loan payments, and if they miss their mortgage payments, things are bad.
Blog Summary: Credit card missed payments are at their highest level in over 10 years. Auto loan missed payments are at their 5-year high, and missed mortgage payments are increasing but not to a worrying level, mainly due to low interest rates and large equity in most homes. However, new home buyers are at a higher risk of defaulting.
Credit Card Delinquent Payments
Credit card delinquency is rising quickly. This is due to inflation, recent job loss, and increased housing costs. The overall slowdown in the housing market is also drying up a lot of national income from transaction fees triggered by home purchases and sales. This impacts mortgage lenders, real estate agents, real estate attorneys, appraisers, and inspectors and where they would spend their money. This is one more reason why there may be less money to go around and pay for these credit cards and auto loans.
The images below show when someone is 90 days/3 months late on their respective payments.
Auto Loan Delinquent Payments
Missed auto loan payments rose in 2018/2019, but $1,200 in COVID checks and cheap money caused the car market to increase so much that you could always sell your car at a profit before buying a new one, which led to a short-term drop in missed payments. But now, after people have purchased their new vehicles at high values between ‘21 - ‘23 and ridden the price down over the last 12-18 months, they are underwater on their vehicles. Owing more than it’s worth and being stuck with their unaffordable car payment. This is a problem that likely isn’t going away quickly and is seen with car repos increasing 23% since last year.
Mortgage Delinquent Payments
From a 10,000-foot view, there are no signs of trouble in the delinquent mortgage payment department, and there are a few reasons for this.
Historically, most mortgages have low interest rates, and when people refinanced in 2021 for a 3% interest rate, this kept their holding costs low, especially compared to new buyers.
An increase in home prices insulates homeowners who purchased before 2020. And if they need cash they can always refinance, use a HELOC, or sell their home to access the cash for any financial hardship.
But, this chart is looking at all home buyers. What happens when we look at recent home buyers? According to listwithclever.com, 43% of recent buyers say they have struggled to make their mortgage payments on time. If we look at the mortgage interest rate chart below we can see that most new homeowners have an interest rate of over 6.5%, which is a small fraction of all homeowners. This means that the at-risk population for homeowners is relatively small but still worth being aware of.
What To Do Next?
This data tells me a few things.
Cash flow is getting tighter in the average American home.
The rise in home prices is protecting those who owned a home before 2020 from the same financial sting others may be feeling.
Because of the continued rise in delinquent payments, I would consider making slight conservative adjustments to my portfolio.
Conservative portfolio changes may look like finding investments that don’t correlate with stock market returns, increasing exposure to bonds and large-cap value companies, and decreasing exposure to growth/speculative investments. And ensuring that you are living within your means and maintaining an emergency fund or access to low-interest rate credit in case of an emergency. I hope you found this helpful and let me know if you have any questions or concerns.
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