Mortgage Activity Highest Since 2005

Mortgage Purchase Applications Growth Continues

Composite index for mortgage applications was up 1.1% in the week of February 7th after rising 5% in the prior week. With rates being near their record low, it’s no surprise the refinancing index is spiking. Refinance index was up 5% after increasing 15% in the prior week. 

As you can see from the chart below, the purchase index has spiked in recent weeks (the picture is a bit muddied when you look at weekly growth). Yearly growth was 16% in this report after it was 11% and 17% in the prior 2 weeks. This upturn in the housing market has been supported by the spike in housing starts and the job creation in the construction industry.

Q4 Household Debt

In Q4 2019, total household debt rose $193 billion to $14.15 trillion which was the 22nd straight quarterly increase. That’sa 1.4% increase as it reached a record high. It’s common to see headlines reporting record high debt to scare people, but unless service payments are high, this isn’t an issue. 

In Q3 service payments as a percentage of disposable income was at a record low going back to 1980. Consumers are in good shape. In fact, if debt didn’t increase, I’d be worried. That would signal consumers were uncertain. It would likely be due to weakness in the housing market.

Non-housing debt rose $8 billion to a record $4.2 trillion. Housing debt rose $120 billion to $9.95 trillion which is $40 billion below its record high in Q3 2008. It’s amazing that 11.25 years later, mortgage debt is still below its peak. Based on its recent increases, it should finally hit a new record this year. This time the debt is much more sustainable as there aren’t loans with teaser rates and liar loans. 

Mortgage debt is a much lower percentage of the economy, household income, and household debt for that matter. Mortgage originations volume rose to $752 billion from $528 billion which was the highest total since Q4 2005. That was because of the spike in refinancing. Median credit score of mortgage originations rose 5 points to 770. That’s very high. Lending has been sound this cycle.

Within non-housing debt, credit card debt increased the most as it rose from $880 billion to $930 billion. Q3’s reading was only the first record high of this cycle. Auto debt was up from $1.32 trillion to $1.33 trillion. Percentage of auto debt given to borrowers with below a 620 credit score rose from 19% to 20% which is still below the cycle peak of 25% in Q2 2015. Last cycle it peaked at 32%. 

Current percentage isn’t too elevated; auto loans have a high delinquency rate. Student debt rose from $1.5 trillion to $1.51 trillion. Its 4.7% yearly growth rate is the slowest ever as it fell from 5%. It being the slowest ever doesn’t imply fewer people are going to school. Growth rate started high in 2006 when the total was much smaller. Student debt is still a huge issue for millennials as shown by the Democratic candidates’ plans to eliminate it partially or completely.

90+ day delinquency rate on mortgages rose from 1% to 1.1%. That’s an inconsequential increase. Delinquency rate on credit cards rose from 8.3% to 8.4% which was the highest since Q2 2015. Total credit card debt isn’t an issue, but it’s concerning that the delinquency rate is so high in an economy with high employment and decent wage growth. This won’t cause a recession, but I’m interested in how high it can spike in one. Delinquency rate on student loans rose 0.2% to 11.1% which kept it in its recent range. Real default rate is higher than the stated rate because defaults spike after the 3 year tracking period ends.

Delinquency rate on auto loans rose from 4.7% to 4.9% which was the highest since Q3 2011. Last cycle’s peak was 5.3% in Q4 2010. This high rate provides a similar takeaway to what I said about credit card debt. If the rate is this high during an expansion with low unemployment, how high can it get in a recession? Clearly, this high rate won’t catalyze a recession on its own unless it gets even higher. Auto sales have been plateauing for the past few years despite the elevated delinquency rate.

Small Business Confidence Increases Slightly

NFIB small business confidence index rose from 102.7 to 104.3 in January which beat estimates for 103.2 and the high end of the estimate range which was 103.5. The chart below shows the intermediate term trend has been modestly lower because of higher uncertainty. This decline may be related to the Democrats winning the House in 2018 because small business owners tend to support the GOP. In the next few months, small firms might become more uncertain as the election approaches.

Within the small business sentiment report, 6 categories increased and 2 fell. Biggest increase was in the net percentage of small firms expecting real final sales to be higher as it was up 7 points to 23%. This is a great increase. It might have been catalyzed by optimism on trade. Another great increase was in earnings trends which rose 5 points to -3%. Current job openings were up 4 points to 37% which differs from the JOLTS report. Obviously, the JOLTS report was from a month earlier.

Conclusion

The housing market is improving as low rates are spurring demand. Elevated delinquency rate for credit card debt and auto loans is concerning, but won’t cause a recession. Small business confidence index increased slightly. But this was a very good report because of the sharp increase in optimism about sales and earnings growth. It’s not surprising this report showed strong job openings because the labor market is strong despite what openings showed in the December JOLTS report.

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