Tuesday, July 7, 2009

On Record HELOC Delinquencies and Near-Record Office Vacancies

The American Bankers Association reports that late payments on home-equity loans rose to a record in the first quarter to 3.52% of all accounts from 3.03% in the fourth quarter of last year. Late payments on home-equity lines of credit climbed to a record 1.89%. Delinquent bank-card accounts jumped to a record 6.6% of outstanding card debt in the first quarter from 5.52% in the previous period. Delinquencies and late payments are, of course closely correlated with unemployment, which continues to rise unabated. In the recent past (for example the 2002 recession), when the Fed lowered interest rates, banks would shower consumers with 0% credit card offers and HELOCs, thus cushioning the blow for many of the unemployed until they found work again. What seems to be markedly different this time is that banks are yanking credit card offerers and cutting off lines of lines of credit. According to data compiled by Equifax, US banks issued 9.8 million credit cards from January through April, a 38% decline from the year earlier period. Now that is what I call a credit contraction.

Meanwhile, in commercial real estate land, the US office vacancy rate hit 15.9% in the second quarter. Calculated Risk has a illuminating graph that shows office vacancies going all the way back to the early 90's. It clearly depicts how office vacancies tend to follow the business cycle and really makes you wonder what the hell all of those real estate developer clowns thought they were doing when they were striking deals at ridiculously inflated prices more than five years into an economic upturn that was growing long in the tooth. The peak in office vacancy rates in the previous recession was 17% and it seems we are well on the way to surpassing that record. According to real estate research firm Reis, effective rents fell 2.7% in the quarter. The firm is calling for the vacancy rate to top out at 18.2% in 2010 and for rent to fall through 2011.

I know, it doesn't really seem fair to cram HELOC delinquency rates and office vacancies into one post. But I think both are highly crucial economic data points that focus on what I believe are the two biggest headwinds for our economy:
  1. The consumer is finally tapped out, in debt up to his eye-balls, can't borrow more, can't afford his current debt burden, and is watching his assets deflate.
  2. The commercial real estate market is just beginning to unravel, which will have a devastating impact on banks, insurance companies, not to mention those developers and investors that borrowed way more than the current or future cash flows from their projects can hope to generate.


mrbogue said...

It really is no longer fashionable to pay off your HELOCs, credit cards, or underwater home loan. Defaults will explode from these outrageously high rates. ...and thanks to stupid sites like Facebook and Twitter, more people are going to overwelm themselves in the short interim buying stuff to impress others, and eventually default.

Mr Wrightwood said...

Is there really a link between social networking internet sites and measurable consumer activity. Are you just speculating, Mr. Bogue, or is there a real effect? I would've guessed that the lack of personal contact those sites afford mitigates competitive consumerism.

mrbogue said...

Just speculating Mr. Wrightwood. I'm not sure if there have been any real studies on the subject since Social Networking is in a stage of relative infancy. There are features in Facebook for example, such as the idea of "virtual gift giving" that spurs non-essential purchases such as luxury handbags, jewelry, etc. I have also observed that near default consumers with uncontrolled spending habits are spending a whole lot more, now that they have a medium to announce their purchases, sometimes within a few moments after the transaction!