Foreclosures Rising Amid Record Spending – What’s Next?

I took an in-depth look at the state of consumer spending, with a keen focus on spending patterns stemming from increased incomes and borrowed money. Several of our readers have asked to look into it.

Utilizing data from the New York Fed’s Household Debt and Credit Report, I delved into the surge in consumer foreclosures and their correlation with the wider economy and what it means to the market as a whole.

Throughout my research, I observed the escalating influence of monetary and fiscal excesses, forbearance programs, and foreclosure bans. These factors, I found, are instrumental in crafting a setup for a nasty downturn in the future.

Key Points

1. According to data from the New York Fed’s Household Debt and Credit Report, the number of consumers with foreclosures edged up to 38,840 in Q2. Despite this, foreclosures are still down by about 45% compared to pre-pandemic levels in 2017-2019 and 75% from levels in 2003-2004.

2. Mortgage and HELOC delinquencies have also seen a slight increase, but they’re still below their pre-pandemic levels. Mortgage delinquencies (30-plus days behind) rose to 2.6% in Q2, still lower than the 3.5% seen in 2018-2019. For HELOCs, the delinquency rate dropped to 1.5%, marking the fourth-lowest recorded rate.

3. There has also been a significant reduction in third-party collections and consumer bankruptcies, despite concerns about the economic impacts of the pandemic. Only 4.6% of consumers had third-party collections on their credit reports, the lowest on record. Consumer bankruptcies also remain near historic lows, with only 114,000 consumers filing for bankruptcy in Q2.

The ‘Drunken Sailors’ of Today’s Economy: A Closer Look

In the bustling tapestry of our economy, substantial income gains have outpaced inflation, yielding more coins to spend for today’s ‘drunken sailors’. The source of their confetti showers? Increased earnings from high-yielding sectors such as Certificates of Deposits (CDs), savings accounts, Treasury bills, and money market funds; not to mention significant borrowing for luxurious homes.

So, how well are these spenders managing their credit portfolios? We delve deeper into fresh data from the New York Fed’s Household Debt and Credit Report to understand the dynamics better.

Foreclosures: An Upward Trajectory?

In the second quarter (Q2), the number of consumers with foreclosures edged up slightly to 38,840. Alarmingly, that’s a 45% and 75% drop compared to the pre-pandemic ‘golden era’ of 2017-2019 and 2003-2004, respectively. Some corners are underlining the 340% spike from near-zero in early 2021 when forbearance programs and foreclosure bans held sway. But let’s pause a moment and ask ourselves are these figures as alarming as they seem?

Considering that big percentage increases from near-zero still denote low levels, the ‘crisis’ might not be as severe. Many homeowners can simply sell their homes, clear their mortgages, and depart with some money to spare, provided they have equity in the home and are struggling with their payments. However, dropping home prices could represent a sticky spot, especially for recent buyers who minimized their down payments. For now, these foreclosures dwell near historic lows, thanks to a combination of climbing home prices, forbearance, and foreclosure bans.

Moving On: Mortgage and HELOC Delinquencies

Mortgages transitioning into delinquencies (30-plus days late) also rose slightly to 2.6% in Q2 – still far behind the 3.5% and 4.7% seen during 2018-2019 and in 2005, respectively. Home Equity Lines of Credit (HELOC) 30-plus-day delinquencies stood at 1.5% – the fourth-lowest on record. What’s the takeaway here? Should we be worried?

Not quite. While these indicators have risen, they are far from alarming levels — a testament to the resilience shown by consumers.

Delving Into Third-Party Collections and Consumer Bankruptcies

Third-party collections dropped to 4.6%, an all-time low in Q2. Often reflecting delinquent credit card, personal loan, and payday loan accounts that are sold from lenders to collection agencies, these figures are reassuring for our ‘drunken sailors’. Moreover, consumer bankruptcies linger near their lowest levels as Q2 saw an increase to 114,000 consumers, a 40% and 80% drop from 2017-2019 and 2004-2005 averages, respectively. So what’s the big picture here?

In all honesty, the current economic climate seems relatively robust, especially considering the challenges faced over the past year.

Key Takeaways for Investors

For investors, this data underscores key aspects of the consumer credit market. As foreclosure numbers are comparatively low, and delinquency rates far behind their historical highs, the mortgage sector presents a relatively safe zone. However, should we celebrate just yet? A wise investor observes market trends vigilantly, recognizing that financial landscapes can change rapidly.

Investors may want to keep a keen eye on rising inflation and its potential erosion of purchasing power. It appears rents are rising again which is an indicator of increasing inflation.

In addition, they could consider low-cost index funds or ETFs project viable returns, and direct a portion of their portfolio toward real estate investment trusts (REITs), which could still offer appealing yields in the face of low foreclosure numbers and delinquency rates.

Remember, financial planning and wise investing are critical for navigating ahead, even as we toast our ‘drunken sailors’.

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