US Vacancies & Consumer Credit Delinquencies at Record Highs

Reuters writes U.S. consumers fall behind on loans at record pace:

Soaring U.S. unemployment and a shrinking economy drove delinquencies on credit card debt and home equity loans to all-time highs in the first quarter as a record number of cash-strapped consumers fell behind on their bills.

Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter as more cardholders relied on plastic to meet day-to-day expenses, the American Bankers Association said.

Late payments on home equity loans rose to 3.52 percent from 3.03 percent, and on home equity lines of credit climbed to 1.89 percent from 1.46 percent.

A broader gauge showing late payments on eight categories of loans rose for a fourth straight quarter to a new record, edging up to 3.23 percent from 3.22 percent. That rate actually understates consumer pain because it excludes credit cards. The ABA tracks loan payments that are at least 30 days late.

“The biggest driver is job losses,” ABA Chief Economist James Chessen said in an interview. “When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we’re going to see higher job losses in the next year, and I expect elevated delinquencies.”

The ABA represents most large U.S. banks and credit card companies. Tuesday’s data are a bad sign for them as they prepare to report second-quarter results starting next week.

While improved capital markets may boost the bottom lines of some, analysts expect lenders such as Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Capital One Financial Corp and American Express Co to suffer higher credit losses, especially in cards.

…and U.S. apartment vacancies near historic high:

The vacancy rate for U.S. apartments reached its highest level in more than 20 years in the second quarter and could soon exceed record highs if the recession persists, real estate research firm Reis Inc said.

The national vacancy rate rose to 7.5 percent, the highest since 1987 and an increase of 1.4 percentage points from last year, according to a report Reis released on Wednesday. The record high was 7.8 percent in 1986.

“We are reaching that historic high very quickly,” said Victor Calanog, Reis director of research.

The second-quarter vacancy rate was 0.20 percentage point higher than the prior quarter and up from the cyclical low 5.5 percent reached in 2006, Reis said.

The U.S. recession has taken a toll on the U.S. apartment market, which largely relies on employment growth to fuel demand. Its largest tenant group, 18- to 24-year-olds, has been hardest hit by rising unemployment. Meanwhile, the apartment buildings sector has led all commercial real estate categories on loan defaults.

I know a few people who lost their jobs in San Francisco and had to move to other places to find new employment and/or stay with family for a while and look for a new job. The startling effects of this are only just beginning to show in the rental market.

Just an example: A friend of mine who lives in the same complex as I do used to pay $2,600 for a 1 bedroom / 1 bathroom apartment. Now that his lease was up for renewal he checked with the landlord on other options in the same complex. Without the slightest qualm they told him to move into a 2 bedroom / 2 bathroom apartment which is becoming vacant now, for $2,550.

As I already mentioned in January, we have reached the peak. Expect rents to continue to drop sharply in the months and years to come, especially in the insanely overpriced cities San Francisco and New York.

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Consumer Credit – June 2009

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Total consumer credit outstanding dropped to $2.5 trillion in April of 2009. This is the 4th month straight since the peak in December. It has dropped by a total of $89 billion since then. This goes hand in hand with the end of consumerism and is a harbinger of the coming and ongoing contraction in the production of gonsumer goods in the US. It is the downward side of the consumption business cycle in full swing.

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Sick and Tired of Debt

I have said it many times. The scourge in the US system is not a lack of credit, “tight credit“, “frozen credit”, or whatever else the Bernankes, Geithners, and Obamas would have us believe. Nor do we need to get “credit flowing again”, “consumers borrowing again” or anything remotely close to it.

We need the opposite: Savings. We got to where we are because of too much debt and credit. People over leveraged themselves into bankruptcy, they are sick and tired of debt. Borrowing has plunged and consumer credit will continue to contract precisely for that reason.

Rarely does anyone stop and ask the question: “Do people actually want to borrow any more money?” Of couse they don’t, why in the world should they?

Kelly Evans writes Worries About Economy Weigh on Loan Demand:

Maria O’Brien, a 27-year-old free-lance writer, and her husband are planning to do something later this year that they would have thought crazy in the past: buy a minivan — with cash.

“It’s worth the sacrifice right now to get out of debt,” Mrs. O’Brien said. “It means living more frugally, but also more freely.”

Banks are under fire for not lending enough and for tightening terms of credit, contributing to a drop in U.S. economic activity. But as the O’Brien family illustrates, the loan market’s shrinkage isn’t just about the supply of credit. It is also about weak demand for credit, a byproduct of households and businesses wary about the economy.

I would actually contend that the sole reason for lack of lending is the weak demand for credit. Banks have been flooded with excess reserves:

Meanwhile consumer credit continues to contract.

She goes on to write:

“Lending money is the bread and butter of banking,” said James Chessen, chief economist for the American Bankers Association. “The money is there, but banks are running smack into a wall of poor loan demand.”

The O’Briens, who live in Front Royal, Va., with their three children, are putting aside at least $500 a month toward the purchase of a used minivan in the $6,000-$8,000 range. They are also imagining a debt-free future.

“Once we get rid of it, we’re never going back,” Mrs. O’Brien said.

As consumer spending contracted last year, growth in household borrowing screeched to a halt in the fourth quarter after growing at a 10% annual clip earlier this decade, according to the Federal Reserve.

“We’re in a recession, and it’s one where households came in highly leveraged,” Fed Chairman Ben Bernanke said recently. Combined with firms “cutting back on their investment,” he expects to see weak demand for loans.

Loan demand began to fall sharply toward the end of last year and continued to weaken in the first three months of this year, according to the Fed’s periodic survey of bank senior loan officers. A pick-up in demand for mortgage loans is a notable exception.

In the latest survey, for instance, 18 banks said demand was moderately or substantially weaker than three months earlier, but only nine said it was moderately stronger. On balance, the Fed said, 60% of U.S. banks reported weaker demand for commercial and industrial loans.

The O’Briens have long dreamed of being debt-free. But they began to pay off loans more aggressively after Jeff O’Brien’s construction work dried up last year, leaving them at times without steady income to support mortgage, car, credit-card and student-loan payments. Mrs. O’Brien took on more free-lance work, while her husband transitioned into a career as an insurance adjuster.

In the meantime, they have scrimped and saved to pay down a third of their $30,000 credit-card and student-loan debt and sold Mr. O’Brien’s beloved Ford truck to eliminate that monthly payment. Aside from the mortgages on their two houses — one they live in, and one they rent out — they are planning to be debt-free by next April.

“Once we do that, we’ll tackle the mortgages,” Mrs. O’Brien said.

They aren’t alone. At Arizona Central Credit Union in Phoenix, which has 70,000 members, loan applications plunged last fall as the financial crisis intensified. The credit union saw more than 3,000 loan applications in September, totaling $13.9 million, a “fairly normal” month according to chief lending officer Patty Aker. That dropped to 2,300 applications in October, just over 1,000 applications in November and 900 in December. Loan applications rose slightly in January, then dropped again in February, to 895, totaling just over $4 million.

“We’ve got money to lend, it’s just that people were so nervous about what was going on in the economy,” Ms. Aker said. “So many people had lost jobs or were afraid they’d buy a car and then GM wouldn’t be around anymore to honor their warranties.”

More than two-thirds of Arizona Central’s $285 million loan portfolio are vehicle loans; the rest is comprised of other types of consumer loans and a small amount — about 10% — are small-business loans.

Across town, the National Bank of Arizona, primarily a business lender, is seeing a similar drop in demand. Business applications for new-equipment leases tumbled 28% in the first four months of this year, compared with the same period in 2008. Loan applications from small businesses are down 11.5%.

“Deal flow just came to a screeching halt” late last year, said Brent Cannon, executive vice president at the bank. He added that because many small businesses use their home equity as collateral, woes in the Phoenix real-estate market threaten to keep a lid on demand.

Lending can’t be forced. This is the End of Consumerism in action. Credit expansion only goes on for as long as the people play along. When they’ve had enough, they’ve had enough.

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Consumer Credit – March 2009

The total consumer credit volume in the US has dropped to $2.53 trillion, a drop of $27.2 billion from February. It has now fallen from its December 08 peak by $64 billion:

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When looking at the chart above one might think that this might as well be just another ditch like the ones that usually followed December.

But one has to realize that the chart above starts at 2001. From 2001 through 2007 the American attitude was consistently biased toward more and more borrowing and more and more spending.

But these attitudes have changed. The end of consumerism is not just a temporary recessionary ditch. It is a fundamental shift in psychology and attitudes that can carry on for a very long time.

When looking at the long term chart of consumer credit, one gets a better picture of where we can go from here, assuming that this consumer cradit bubble that started in 1993 has burst:
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Simply put: I think the roller coaster has reached the top.

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Consumer Credit February 2009

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From January to February 2009 consumer credit outstanding in the US has dropped by $27.5 billion or 1.1%. This is the largest monthly drop since January 1998.

This is just the beginning of a massive unwinding of consumer credit and a corollary of The End of Consumerism.

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