Consumers in financial distress are increasingly placing more value on paying their mortgages than their credit cards, a reversal of the trend observed during the housing downturn, a TransUnion study found. Auto loans, though, still remain the most valued asset of the three leading credit instruments.
The study also validated the strength of the correlation between rising or declining home prices and consumer payment preferences between mortgages and credit cards in situations of constrained liquidity.
We had previously determined that, beginning in 2008, consumers had a higher propensity to go delinquent on their mortgages than on their credit cardsa reversal of traditional payment patterns, said Steve Chaouki, co-author of the study and group vice president in TransUnions financial services business unit. This occurred in an economic environment marked by the build-up and bursting of the housing bubble. In fact, it is broadly believed that the shift in payment preferences was largely derived from the struggles of the housing market. For the first time since the housing bubble, we now see consumers valuing their mortgage payments as much as their credit cards, though auto loans remain the most valued of the three.
The TransUnion study captured the responsiveness of payment behavior to both periods of significant home price depreciation as well as periods of significant appreciation, with a sample window spanning from January 2008 to December 2012. The delinquency measure was based on 12-month rolling consumer cohorts. For example, the first cohort included all consumers in the sample who had a mortgage, credit card and auto trade in good standing as of January 2008, and then measured the presence of a 30 days past due or worse delinquency as of January 2009.
In the span of the study, the findings clearly show the level of mortgage delinquencies have nearly reached credit card delinquency rates when observing each cohort for a specific year.
With continued improvements in housing prices, its quite possible that by the end of 2013 we will see 30-day mortgage delinquency rates well below credit card delinquencies of that same timeframe, added Chaouki.
To determine how much of an impact housing prices had on the rate of payment on credit cards versus mortgages, TransUnion looked at the delinquency spreads between mortgage and credit cards over the sample period, compared to the Standard and Poors Case-Shiller 20-city Home Price Index. For instance, if the 30-day credit card delinquency rate was 1.25% and the 30-day mortgage delinquency rate was 1.75% for a given year, then there would be a 0.50% spread between the two variables.
Looking at the delinquency spread in comparison to housing prices, we observed an interesting pattern with three phases: rapid increase, stabilization, and rapid decrease, said Ezra Becker, co-author of the study and vice president research and consulting at TransUnion. These three phases of delinquency behavior appear to be primarily driven by the evolution of home prices.
The study also found variances for the major markets impacted by the housing bubble. For instance, Los Angeles, Chicago and Dallas experienced the housing crisis quite differently.
· Los Angeles: There was a significant correction in housing values, followed by a period of stable prices and a recent period of fast price appreciation.
· Chicago: Also experienced a significant price correction, but of a different nature than Los Angeles, with sustained decreases and no significant rebound in the recent period.
· Dallas: Mostly insulated from the housing crisis, it had stable price conditions throughout the sample period.
These differences in the trend of home prices resulted in distinct payment hierarchy experiences across the three geographies. While the delinquency spread between mortgage and credit cards for the United States peaked at just over 1%, markets hit hard by the mortgage crisis had much more elevated spreads.
In the case of Los Angeles, which had both a large home value correction and large rebound, the delinquency spread between mortgage and credit card peaked early on at above 4%, but declined continuously until reaching near-parity levels by the end of the sample period.
In contrast, Chicagos delinquency spread peaked at 2% a year later than Los Angeles and hovered between 1% and 2% through the end of the period. Dallas delinquency spread experienced little change over the sample period, starting and ending below zero and moving within a narrow band.
These market examples provide a glimpse into regional dynamics and help explain how the mortgage crisis impacted consumer payment patterns, said Becker.