Today, we all feel “Boxed In,” with financial uncertainty appearing everywhere. I was conversing with a friend last week about the state of the economy, and we were both having a bit of a head-scratching moment. Like me, he has been involved in or closely followed the finance industry for over fifty years. We lived through the Jimmy Carter years, the S&L Crisis, the Dot-Com Bubble, the 2008 Mortgage Crisis, the Pandemic, and the Post-Pandemic Economy. We have seen interest rates as high as 21% and as low as 0%. We have the battle scars to know what a financial downturn looks and feels like, and cracks are starting to show. That uneasiness begins to weigh on everyone when things are “not quite right” is here. (THIS IS AN ABBREVIATED VERSION OF THE FULL ARTICLE ON THIS TOPIC WHICH CAN BE ACCESSED HERE)
Dancing to Exhaustion
During the Roaring Twenties, our bad investment habits were the catalyst for disaster. This time, our issues are Washington and sudden foreign distaste for our debt. In the 1920s, so long as the stock market kept going, some portion of the population was content to believe the band would play on forever. These people danced into the night before October 24, 1929.
I feel like we are watching a rerun of the movie “They Shoot Horses, Don’t They?” where participants in a dance-a-thon will dance to exhaustion in the pursuit of short-term gains. So long as the consumer is willing to borrow and spend to pay for the band to play, we dance on. The question for the FED is, “Are they the band at a Depression Era Dance-a-Thon?”
The New York FED
The New York FED has a unique role as the source for much of our consumer data. The New York FED sent warning signals in the most recent quarterly report. Maybe this is a hangover from the Covid years, ignorance, or manipulation, but for now, we dance on.
The most recent NY FED report showed some troubling trends in consumer borrowing, with household debt now cresting to $17 trillion. Mortgage Debt, HELOC Loans, Student Debt, Auto Debt, and Credit Card Debt all rose. But the system is fed on one end and eaten on the other. Borrowers piled into the party, while the number of seriously delinquent loans (over 90 days) rose. Like the FED, consumers may borrow from their credit cards to keep their mortgage current. We certainly have hints of that phenomenon, and why not, it is how the Government operates.
Today, we are fighting rising debt and delinquencies, higher interest rates, weakening bank balance sheets, weakening consumers, massive government debt, and funding someone else’s wars. There seems to be no positive short-term outcome, and the weight is growing. Even with a political change in Washington, this mess will take decades to unravel if we can muster the will.
Mortgage Debt
During the third quarter, mortgage balances and home equity loans measured $12.5 trillion. The notable statistic is the number of loans slipping into serious delinquency status. By the end of the third quarter, that figure had grown from 0.51% to 0.72%. There were 36,000 new foreclosures, and we know that delinquencies and bankruptcies are not at historical highs, but the warning signs are in the trends. In a recent analysis by the Mortgage Bankers Association, they warned:
“…distressed homeowners may be utilizing available loss mitigation options that prevent a foreclosure start. Additionally, accumulated home equity may also be enabling some homeowners to sell their homes well before foreclosure becomes a possibility.”
They also warned that increased unemployment, a FED goal in their inflation fight, will mean higher delinquencies and foreclosures.
Credit Card Debt
Of most concern to me is the rise in credit card debt. For many consumers, this is an unwise source of lifestyle financing. Credit card debt and delinquencies have reached new highs. This year, consumer credit card debt surpassed $1 trillion for the first time. Particularly alarming is a note from the NY FED that if you are addicted to debt, you continue to borrow, digging the hole deeper. At the end of the third quarter, credit card debt reached $1.1 trillion. Over that same period, delinquencies grew from 3.69% to 5.78%.
Consumers are now moving on to Buy-Now-Pay-Later (BNPL) loans, with interest rates as high as 35%. These are especially attractive as we enter the Christmas season since they often require no down payment. Most BNPL purchases go toward consumables like clothes, home décor, furniture, beauty products, and technical devices. The total market is estimated to reach $90 billion in the U.S. by the end of 2023.
Auto Loan Debt
Over the past decade, the outstanding auto loan debt has doubled to $1.6 trillion. A shortage of used cars drove prices up, and at the same time, automakers implemented unprecedented price increases on new vehicles. Delinquencies on auto debt grew from 2% to 2.5% in just one quarter, which could be the first crack in this dike.
Adding to this mess is the debacle around electric vehicles. Automakers have finally learned that supply exceeds demand and are stuck with unwanted inventory and factories geared to the wrong production. Automakers have also pushed the cost of EV infrastructure to the dealers, who now must bear the cost of unwanted and unneeded charging stations. Coupled with lower sales, auto dealers pose a real risk.
Student Debt
Student debt rose by $25 billion in the last quarter to $1.6 trillion. With all the discussion surrounding loans and unwise decisions about the value of college, one would think this would moderate. There is a time lag in reporting student loan data; we will not know the whole story for months. According to the NY FED, delinquencies declined during the quarter, but this is likely a result of forced repayments as COVID-19 abatements have expired.
IRA Early Withdrawals
When cash flow becomes difficult, one source of consumer funds is early withdrawals or loans from their IRAs or 401(k)s. Avoiding home foreclosure or eviction qualifies as a hardship that allows withdrawals without tax penalties, and this has become a funding source of choice for many. During the third quarter, 5.5% of IRA holders took a hardship or other withdrawal from their tax-deferred savings, up from 4.5% in 2022. This is merely a Band-Aid to patch ongoing issues; eventually, the money will run out.
All Things Considered
Our nation has its back against the wall and must come out fighting. We are “Boxed In” and “Weighed Down” with bad decisions, policies, and inflation. It is time to start making good decisions on both a personal and national level. If there is any good to come from all this, it is the realization that, individually and collectively, we must address our addiction to debt and bring it back within reason, or shifting world alliances will force us to do so.
What Can I Do?
My wife reviewed this article and asked the tricky question that I assume none of us wants to consider, “So, what can I do?” I am in a small Georgia town, minding my own business, and these major forces are at play. What can anyone do in the face of such complexity?
“Bad men need nothing more to compass (contrive to accomplish) their ends than that good men should look on and do nothing.”
John Stewart Mill
This looks daunting, and waving a magic wand will not solve it. But there are things we can do individually and within our families to be sure we weather any financial storm. These are practical things we all know but are so difficult to accomplish.
- Develop and teach our children about good financial habits.
- Take financial education seriously with our children and take classes if necessary.
- Use debt sparingly and only where we can see the path to repayment.
- Maintain a good credit rating so we borrow at the lowest possible rates.
- Save so we have the money necessary to weather brief periods of disruption.
There is nothing easy about creating personal financial security. But outside forces may do short-term harm once we do, but that is all. We can be part of the solution and not the problem.
Resources Used in this Article
27 Buy Now, Pay Later Statistics (2023 & 2024), by Josh Howarth, Exploding Topics, explodingtopics.com, January 18, 2023.
401(k) balances down, hardship withdrawals are up. But it’s not all dire., by Michelle Singletary, The Washington Post, washingtonpost.com, December 1, 2023.
BNPL (Buy Now, Pay Later) – statistics & facts, Statista, statista.com, October 17, 2023.
Buy now, pay later statistics, by Heidi Rivera, edited by Hannah Smith, Bankrate, bankrate.com, October 12, 2023.
Center for Microeconomic Data Household Debt: Household Debt and Credit Report, Household Debt Rises to $17.29 Trillion Led by Mortgage, Credit Card, and Student Loan Balances, newyorkfed.org, Last accessed December 5, 2023.
CEO Dimon to sell some of his JPMorgan shares for first time, by Niket Nishant, Lananh Nguyen, and Nupur Anand, Reuters, reuters.com, October 27, 2023.
Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey, Consumer Financial Protection Bureau, consumerfinance.gov, March 2023.
Data and Statistics: Federal Reserve Bank of New York, newyorkfed.org, Various Searches, Last accessed December 6, 2023.
Equity Withdrawals Rose Slightly In Q3 2023, by Keith Griffin, National Mortgage Professional, nationalmortgageprofessional.com, December 4, 2023.
How does buy now, pay later (BNPL) work? By Kiah Tresse, Mia Taylor, and Maddie Panzer, USA Today, usatoday.com, December 7, 2023.
JPMorgan Billionaire Jamie Dimon Will Sell $141 Million Of Bank’s Stock, by Derek Saul, Forbes, forbes.com, October 27, 2023.
Market bets for 2024 thrown into chaos by US recession conundrum, by Naomi Rovnick, Reuters, reuters.com, December 7, 2024.
Mortgage Delinquencies Increase in the Third Quarter of 2023, by Falen Taylor, Mortgage Bankers Association, mba.org, November 9, 2023.
Mortgage delinquencies on upswing, but not yet ringing alarm bells, by Nick Manes, Crain’s Detroit Business, crainsdetroit.com, November 10, 2023.
Mortgage demand rises again as rates drop to 10-week low, by Megan Henney, FOX Business, foxbusiness.com, November 29, 2023.
Total Household Debt Reaches $17.29 Trillion in Q3 2023; Driven by Mortgage, Credit Card, and Student Loan Balances, Federal Reserve Bank of New York, November 7, 2023.
Why U.S. Companies Are Behaving Like We’re in a Recession, by Wall Street Journal, Video narrated by Dion Rabouin, WSJ Video, wsj.com, December 4, 2023.
