Saturday, September 15, 2007

Consumer Spending Continues, Where is the Money Coming from? Credit Cards

Americans, are turning back to credit cards... with far higher rates then their home equity loans (their home ATM), to continue to spend over their means. Truly - this trend amazes me, not from the point we are a consumer culture but at what point do people look in the mirror and say enough is enough.

The numbers are astonishing - in fourth quarter 2005 at the height of housing boom, Americans extracted $105.5 Billion in equity to fund spending. By first quarter 2007, not even 18 months later, that number dropped 35% to $67.9 Billion. How are we making up for it? Read on....
  • Consumers are carrying a record $907 billion in credit card debt, and that looks likely to jump now that the housing slump has blunted another popular financing tool -- home equity loans.
  • "The home equity spigot has been really shut off over the last nine months or so. With (home price appreciation) stagnating, borrowers have not had the opportunity to refinance as much as they had, or cash out for spending needs," said Joe Astorina, securitization analyst at Barclays Capital.
  • "Growth in credit card receivables is offsetting the decrease in home equity borrowing for consumer spending. Consumers are using their credit cards again," said Astorina.
  • The problem is, credit cards typically come with steeper interest rates and fees, and usually a much lower limit on borrowing. And if credit terms tighten further and card issuers clamp down, consumers will have little choice but to cut back on spending -- a worrisome thought for the U.S. economy as the all-important holiday shopping season approaches.
  • U.S. Federal Reserve data released on Monday shows that as of July, consumers had racked up $907.4 billion in revolving credit, which is made up of credit and charge cards. That was up 6.6 percent from a month earlier, bringing the annual growth rate to 6.5 percent -- more than three times the level for nonrevolving credit, which includes closed-end loans for things like cars or college education.
  • "Households have apparently substituted credit card debt for mortgage equity withdrawal," said Haseeb Ahmed, U.S. economist with JPMorgan in New York. "The acceleration in revolving credit growth over the past year underscores downside risk to the consumer from recent tightening in lending standards."
  • As that spending shifts to credit cards, financing won't come as cheap. According to the Fed, the average interest rate on credit cards was 13.46 percent in May, the most recent month for which data was available. The national rate for a $30,000 home equity loan was 8.43 percent, according to tracking firm
  • Liam McGee, head of consumer banking at Bank of America Corp, said it was too early to determine how the credit crunch would affect consumers, but already the bank was seeing a decline in spending on discretionary items like recreation.
Takeaway: Well I wonder who is holding these "credit card asset-backed securities" - looks like yet another shoe to fall in about 12 months. I guess now you could make a case for Fed fund cuts - at least that will keep interest rates on credit cards stable/lower... (what a case, eh?)

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