7 minute read
1. First Decline in a Decade: The National Average FICO Credit Score Decreases
- The national average credit score dipped by one point to 717, marking the first decrease in ten years.
- This drop is linked to a rise in missed payments and escalating debt levels
What you need to know: The average consumer credit score in the U.S. has dropped for the first time in a decade, albeit by just one point. FICO scores serve as a gauge of consumer credit risk and are commonly employed by US banks to evaluate lending.
Why it matters: According to the data analytics firm's report1 on March 6, the primary factors behind the decline are identified as an increase in missed payments by borrowers and a rise in consumer debt levels. By October 2023, the share of the population experiencing delinquency of 30 days or more had climbed to slightly over 18%, marking an increase of approximately 4% since April 2023. This uptick was observed across various loan types including credit cards, auto loans, and real estate loans. Meanwhile, average credit card balances surged by 5.9% to reach $7,306 during this timeframe.
Now the Dunham Deep Dive: This shouldn’t come as a surprise as consumers binged on credit and are now facing rising delinquencies. More worrying is that consumers are carrying a large credit balance ($7,306 as of October 2023) during a period with record-high APRs2 (annual percentage rates).
Now, since 2009, average FICO scores have continued increasing. For example, since scraping 686 in October 2009, the average FICO score has jumped more than 30 points.
Since then, there’s been a steady worry of “credit score inflation” making FICO less reliable and understating potential credit risks.
My main fear is that – especially since 2020 on the back of government stimulus – millions of households saw their credit scores surge “dramatically”, which allowed more debt-taking as limits were increased, standards eased, and heavy new card issuances.
But alas, now, as the COVID stimulus safety net faded away, folks who moved up to a better credit tier might slide back into their old habits of missing payments and taking on excess carry balances – which is what we’re already seeing as delinquencies of all kinds rise well above pre-pandemic levels.
As Ethan Dornhelm - vice president of scores and predictive analytics at FICO – noted, “It’s a notable milestone that we’ve seen the average score decrease... This isn’t a blinking red light, but it certainly is a yellow light.”
Time will tell.
2. China's Housing Market Slump Deepens, Despite The Government’s “Best” Efforts
- The sales of the top 100 property developers plunged by 60% in February.
- China is running out of conventional growth options, which could have many ripple effects globally.
What you need to know: China's housing market continued its downward trend in February despite regulators intensifying their attempts to revive the struggling sector. For instance, preliminary data from China Real Estate Information Corp revealed that the value of new home sales by the top 100 real estate firms plummeted3 by -60% compared to the previous year, amounting to 185.9 billion yuan ($25.8 billion). This decline followed a 34.2% drop in January. Additionally, February's sales witnessed a further decrease of 20.9% compared to the previous month.
Why it matters: The ongoing property downturn continues to pose a significant challenge for China's economy, adding pressure on developers grappling with debt repayment and project completion. Last month, Country Garden Holdings Co., formerly the country's largest property builder, faced a creditor's petition in a Hong Kong court for winding up the company due to a missed debt payment. This action follows a month after China Evergrande Group was instructed to liquidate, representing the largest collapse during the three-year downturn.
It's important to note that these two property developers alone have roughly4 $500 billion in liabilities.
This isn’t exactly solid footing for rebuilding housing confidence, which may ripple as declining property investment leads to job losses, deflation, and anemic growth.
Now the Dunham Deep Dive: I still believe that China is currently stepping into its own 2008-esque bust. After a decade of excess building (fueled by massive amounts of debt), they have hit the inevitable law of diminishing returns and oversupply.
And the government policies to try and support prices have so far not worked – and if anything, made things worse (looking at the data).
For instance, due to this significant surplus of housing, any efforts to stimulate the property market may take some time to translate into actual construction, if they do so at all. Meanwhile, with a declining population and urbanization rate, there are fewer fundamental factors supporting housing demand in China.
Consequently, the country might encounter a prolonged period of sluggish growth as it addresses its debt issues, reminiscent of Japan's "lost decade" (aka the 1990s and still lost) following the bursting of its property and stock market bubbles.
Making matters more interesting is how this will affect the global economy.
Remember, all those Chinese “ghost-cities” took enormous amounts of commodities (specifically from Asia, The U.S., Africa, and Australia). As their construction boom unwinds, this will likely put pressure on the commodity sector globally.
Many focus on China as if it’s isolated. But as the second largest economy in the world, any changes to its economy will have significant impacts all around.
Something to monitor.
3. The Bottom 90% of U.S. Households are Disproportionately Leveraged to Real Estate
- According to the Fed’s latest “Household Wealth” breakdown for Q3/2023, there’s an interesting divergence of assets between wealth groups
- The bottom 90% of households have a significant share of their assets in real estate and durable goods – such as cars, refrigerators, jewelry, etc.
What you need to know: The Federal Reserve publishes data showing the share of U.S. wealth who it’s held by, what it’s in, and how it’s changed throughout history. This is a good measure showing how household wealth - which currently sits at a record high5 of $147 trillion - is distributed between the Top 0.1% and the Bottom 50%. And as of Q3/2023 (the latest data), the bottom 50% of households have 51% of their wealth in real estate with the Top 50-90% having 40%. This compares to the Top 0.1% only having 10% of assets in real estate and Top 90-99% wealth bracket holding 25%.
Why this matters: With the bottom 90% disproportionately exposed to real estate (their properties) as their main asset, this leaves them vulnerable to any property declines. This means that a 10% drop in real estate prices would directly affect the balance sheets of the bottom 90% far more than the top 10%, and this could cause economic malaise.
Now the Dunham Deep Dive: Historically speaking, having a significant share of household wealth in assets can be great during boom times (as prices rise). But conversely, during bust periods (falling prices), it could wreak havoc.
The big issue here – I believe – is two-fold:
- The bottom 90% is the mass consumer, not the top 10% (aka the top 10% can only buy so much toilet paper and clothes, whereas the bottom 90% is a far larger amount of people consuming). Thus if the bottom 90% suffered declining wealth from real estate prices sinking, it would have large ripple effects (just imagine 2008, or China today).
This reminds me of what FDR’s former Federal Reserve Chairman – Marriner Eccles – said in his memoirs after trying to handle the Great Depression:
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."
Sound familiar? With credit card debt, mortgages, and auto loans surging as “real” (inflation-adjusted) wages remain anemic – his words ring eerie.
If credit has fueled demand and kept prices higher, then it’s reasonable (and historically accurate) to assume declining demand would do the opposite. And if real estate prices fall, it would snowball into something worse and worse. So it’s important to keep an eye on the wealth structure of the bottom 90% (aka the mass consumer). - The other point is that most of this real estate was bought by mortgages.
Thus, for example, if someone takes out a $1,000,000 mortgage to buy a $1,000,000 home, and the home price drops 15%, it’s not like the mortgage also declines with it. No, if anything, it's increasing from the interest.
Hence the borrower would be “underwater” (loan worth more than asset). And this could lead to issues (unsurprisingly).
All I am getting at is the bottom 90% is disproportionately exposed to any potential real estate shocks (if any even arise). And it could have huge implications on credit, spending, economic growth, retirement, etc if their household balance sheets take a hit.
Anyways, who knows what will happen? Maybe this is just noisy data.
As usual, just some food for thought.
Sources:
- https://www.bloomberg.com/news/articles/2024-03-06/national-average-fico-score-drops-for-first-time-in-decade?sref=nD2OD0Ri
- https://www.dunham.com/FA/Blog/Posts/credit-card-hangover
- https://www.bloomberg.com/news/articles/2024-02-29/china-home-sales-drought-persists-despite-mounting-support?sref=nD2OD0Ri
- https://www.washingtonpost.com/business/2023/10/25/what-is-happening-with-country-garden-2007-hk-and-its-debt/e1477030-7396-11ee-936d-7a16ee667359_story.html
- https://fred.stlouisfed.org/series/BOGZ1FL192090005Q
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