Rising Defaults on Credit Card Bills

This can’t be good:

"US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years."

I suspect that there is a big swath of folks who can no longer refi their homes . . .  So after their rates reset 300 bips or so, they take cash advances  to pay the mortgage — then default on the Credit card debt, rather than the mortgage.

However, as FT notes:

"But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry.Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before losing their credit cards."

(I have been meaning to get to this issue for some time. Let me see if I can dig up a chart on this to put it into some perspective . . .)

One other thing:

"Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

Scott Hoyt, economist at Moody’s Economy.com said: "Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly and gasoline and other energy prices remain high."

The Chicago Tribune adds:

"Now that the easy money in home mortgages is all but over, consumers
may soon be caught in a financial squeeze with their credit cards.

That’s the worry among some economists and credit counselors as home
lending has shifted abruptly into low gear this summer. That leaves
homeowners owing big sums to Visa or MasterCard without an important
escape hatch — the ability to pay down the plastic by dashing off a
check from their home equity line of credit or rolling the debt into a
new, bigger mortgage.

"You’re not going to be able to get that
mortgage loan. You’ll be stuck with the higher interest credit card
debt," warns Carl Steidtmann, chief economist with Deloitte Research.
"We will have to live within our means. I know it’s a troubling
phenomenon. But we’re not going to be able to spend at levels well
above our income levels."

This is worth watching, as it can reveals the degree of actual financial stress the consumer is under . . .


Defaults on credit card bills in US rising
Saskia Scholtes
FT, August 28 2007 03:00

The next credit crunch?
As home loan market tightens, mounting credit card debt could spur new crisis
Susan Chandler
Chicago Tribune, August 26, 2007

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New Home Sales= Zero Gains, +/-

"The U.S. Commerce Department said Friday that new home sales rose 2.8% in July after falling 4% in June."

That was how most of the MSM covered Friday’s New Home Sales. 

The problem is, it is not correct.

First, let’s start with the actual data release, via Commerce:

Sales of new one-family houses in July 2007 were at a
seasonally adjusted annual rate of 870,000, according to estimates
released jointly today by the U.S. Census Bureau and the Department of
Housing and Urban Development.

This is 2.8 percent (±12.0%)* above the revised June rate of 846,000
and is 10.2 percent (±12.3%)* below the July 2006 estimate of 969,000.

That seems pretty straight forward — except the way it was reported ignored the statistical reality.

Commerce noted what the margin of error and statistical significance was.  They included this small caveat about the actual data:

Estimated average relative standard errors of the preliminary data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.

So the correct answer to the question "What were New Home Sales in July 2007" is as follows:

There was no statistically significant change from June to July. According to the Department of Commerce, the range was -9.2% to +14.8%.

There was no statistically significant change on a year-over-year basis, either. Commerce reported a range from -22.5% to +2.1%.

New_home_sales_julyThis is not how it gets reported.

I am not sure if it is a case  of innumeracy or of the media wouldn’t have a story about New Home Sales otherwise.

As the Commerce Department itself reported in the footnotes, Friday’s New Home Sales were statistically meaningless.

Even the nearby chart  has the illusion of precision

Existing Home sales were out today, and may come in for the same treatment later this weekend.

Note: This is before we even factor in the cancellation factor after the jump:


UPDATE August 27, 2007 2:21pm

I see that Northern Trust’s Paul Kasriel comments:

Gain in New Home Sales Is Inconsistent with Reports from Home Builders

Today’s report that suggests a recovery in sales of new homes is not anywhere close. At the same time, the increase in sales and price are suspect because the financial press has a number of stories everyday about home builders reporting significant declines in sales and earnings, a plethora of incentives to move sales, cancellations of contracts, and so on. Cancellations of contracts to purchase homes are not reflected in this report. It is reasonable to assume that excluding cancellations leads to overestimating sales of new homes and underestimating inventories of unsold homes. Also, the home builders (see chart 4) survey for August showed the second lowest reading in the history of series. We need to see reports of future months and watch out for revisions of estimates of home sales.



AUGUST 24, 2007 AT 10:00 A.M. EDT

How does the Census Bureau handle cancelled sales contracts?

Gain in New Home Sales Is Inconsistent with Reports from Home Builders
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