The US consumer seems to borrow and spend borrow and spend and yes you guessed it borrow and spend yet again. Now the bulls will say, never underestimate the US consumer's ability to borrow more money as evidenced by the recent surge in retail data. And yes its true, wage and job growth have given some dollars back to the consumer. That said, many data points suggest these trends are not and can not be sustainable.
Now the bear will say, wait a minute, consider the following:
- personal debt as a percentage of GNP is at 300%
- debt service levels as a percent of disposable income are at record highs at 15%
- personal savings rates are near record lows in negative territory (see chart below)
- equity extraction posted significant moderation to $84 billion in 1Q from $109 billion in 4Q-consider what happens when exisitng home prices experience significant price declines.
- home equity loans slowed to $23 billion (annually) from a peak level of $200 billion
- housing prices have begun to fall (existing and new homes)
- mortgage resets of a 1-1.5 trillion dollars are set to reset this yearup from $400 billion in 2006
To top this off foreclosures are starting to rise at a rapid rate as evidenced by yesterdays report. Mortgages starting the foreclosure process in the first quarter rose to a record high of 0.58 per cent. Specifically looking at the sub-prime market late payments (greater than 30 days) of sub prime mortgages increased 15.75% in 1Q up from 14.44% in Q4. You guessed correctly, this represents yet another record high. And the pain is not just felt in Florida or California. Blue collar markets in the mid west are feeling the pain as well. Ohio, Michigan and Indiana represent 20% of total foreclosures despite only representing 9% of loans outstanding.
To make matters worth, we must ask, are banks prepared for an onslaught of foreclosures. The following chart gives the bear pause to believe so.
Stayed tuned
DB
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