As incomes stagnate and prices rise, a growing number of Americans face a
tough choice: either descend a couple of rungs on the lifestyle ladder or borrow
to keep it together. Many are apparently choosing door number two. From MarketWatch:
Nowhere has the unequal nature of the post-banking-crisis recovery raised more
concerns for the long-term sustainability of the U.S. economy than in the clear
rise of non-discretionary consumer credit.
While the "haves" have fully returned to their pre-crisis behavior of paying
for everything from higher education, cars and luxury homes with cash, and
fully leveraging their investment portfolios, the rest of the consumer sector
has changed dramatically over the past six years.
Upper-middle class "aspirational wealthy" families who were overexposed
to the housing bubble continue to see debt of all kinds as a negative. Rather
than using lower interest rates to purchase larger homes, if not vacation
homes, they have instead opted to convert their 30-year mortgages to 10-
and 15-year loans with essentially equal monthly payments terms. Lower interest
rates have translated into faster loan amortization rather than economic
growth. Well into the recovery, the focus of the upper-middle class remains
on less, rather than more, credit, and -- thanks to demographics -- less,
rather than more, home, too.
Further down the credit spectrum, the world of consumer debt has changed
even more profoundly. For the "have-nots," the continued absence of wage
growth has resulted in an unprecedented boom of non-discretionary credit.
Ordinary life in America now simply requires more debt rather than less to
live. It is needs, not wants, that are behind the post-banking-crisis growth
in consumer credit.
The clearest example of non-discretionary credit growth today is in higher
education. With tuition costs rising far above wage inflation, and families
no longer willing to take out home equity loans to fill the gap, lower- and
middle-class students have no choice today but to borrow for college. A completed
FAFSA (Free Application for Federal Student Aid) form is as much a prerequisite
to college entry as four years of high school English and math. For those
entering college, it is not a question of whether they will borrow, but rather
how much.
But higher education is not the only place in our economy where non-discretionary
credit is now the norm. The same condition today exists with car sales, too.
With the average car on the road more than 11 years old, it's no longer if
Americans will replace their cars, but how.
Here, again, non-discretionary credit fills the void. With savings low,
few Americans can afford much more than the down payment on a new car. Financing,
whether in the form of a loan or a lease, is the only way low- and middle-class
Americans can afford a new or used car.
But please appreciate how stretched non-discretionary car financing has
now become. The following is per the Wall Street Journal:
"[The] average automotive loan term [reached] 66 months for the first time.
According to Experian Automotive's latest State of the Automotive Finance
Market report, loan terms in the first quarter of 2014 reached the highest
level since the company began publicly reporting the data in 2006. The analysis
also shows that loans with terms extending out 73-84 months made up 24.9%
of all new vehicle loans originated during the quarter, growing 27.6% since
Q1 2013.
"The average amount financed for a new vehicle loan also reached an all-time
high of $27,612 in Q1 2014, up $964 from the previous year. In addition,
the average monthly payment for a new vehicle loan reached its highest point
on record at $474 in Q1 2014, up from $459 in Q1 2013."
With maturities of seven years or more, car loans might better be called
car mortgages. But as the Wall Street Journal report makes clear, it isn't
just lengthened terms that have been required. The report also said that
lenders have lowered credit scores while lessors have introduced lower mileage
caps. Just as we saw in housing at the top, lenders are doing whatever they
can to lower the monthly payments to consumers.
Some thoughts
"Non-discretionary consumer credit" is one of those benign-sounding terms
that hide a much darker reality. A few years of this and you either find a
much, much better-paying job or you crash and burn.
Student loans, meanwhile, have gotten a lot of press lately, but seen through
the "non-discretionary" lens they become even more conceptually disturbing.
For a lot of families there really is no choice but to borrow if the kids are
going to get degrees, which are still sold (by the higher ed establishment
at least) as the ticket to the big bright world of symbol manipulation careers.
As for "car mortgages"... I had to get a calculator out to see what 84 months
comes to in years, and it's 7. So basically you're paying on your car until
it's worth next to nothing. In the final year of the loan the total payments
might actually approach the car's resale value -- which you can bet the salesman
neglects to mention while you're signing the contract. One has to wonder if
the auto/banking nexus understands what 7-year loans will do to future demand
for new cars. But of course most of the people writing these loans will be
somewhere else in 7 years, so maybe they know and don't care.
So let's add it up: People putting gas and food on plastic, which will, in
the not too distant future, force them to cut back on everything but food and
gas; college students graduating with debt that prevents them from buying starter
homes, new cars, expensive vacations (or advanced degrees); car buyers locking
themselves into payments that won't end until until their 7th graders graduate
from high school -- at which time college tuition will make a long-term high-cost
loan on the next car mandatory.
In each case the borrowers -- and the lenders -- are mortgaging their futures,
quite literally. As these debts mount, rolling them over will get progressively
harder and more expensive, and a growing number of people, car dealers, credit
card companies and 4-year colleges will find that non-discretionary consumer
credit is replaced by "non-discretionary deleveraging", which is another way
of saying bankruptcy.
