U.S. household credit quality is weakening across all loan types and in nearly every corner of the country. The deterioration is most evident in mortgages. At the end of June there were 2.72 million first mortgage loans in default at an annualized rate. For all of 2008, defaults could very well hit 3 million, up from approximately 1.5 million in 2007, and 1 million in 2006, according to CreditForecast.com, which provides forecasts of consumer credit quality based on data from credit bureau Equifax and economic projections from Moody’s Economy.com.
Household liabilities that are in delinquency or default totaled $775 billion at the end of June, according to CreditForecast.com data. This is equal to 7.5% of all U.S. household debt, up from 3% just two years ago.
The highest mortgage default rates are in Arizona, California, Florida and Nevada, but they are also very high throughout the industrial Midwest, and in parts of the Northeast corridor around Washington D.C., Long Island, NY, and Rhode Island. Metropolitan areas with the highest rate of defaults in the second quarter of this year include Miami, Fort Lauderdale, Naples, Orlando and Tampa Bay in Florida and Sacramento, Fresno, Riverside-San Bernadino, and Modesto in California.
Only one state, North Dakota, has avoided an increase in defaults over the past year, and only 15 of the 200 metro areas covered by Moody’s Economy.com data are not experiencing higher defaults.
While foreclosures in 2006 and 2007 primarily affected speculators and subprime borrowers, a combination of negative equity and a weakening job market is driving a new wave of defaults this year. With national house prices now down 16% from their spring 2006 peak, some 9.6 million U.S. homeowners now have mortgage balances that exceed the market value of their home. This is up from 4.1 million homeowners with negative equity one year ago and 2.7 million two years ago.
Areas where housing markets will continue to unravel the quickest and where economic conditions remain weak will suffer the worst the erosion in household credit quality. By and large, the regions where house price corrections will be largest are also those where house price appreciation was strongest during the housing boom several years ago. Conversely the house price outlook is strongest for counties that missed the boom. These counties are concentrated in the South, outside of Florida, and parts of the West.
Florida and California are home to forty three of the fifty counties that will go through the largest price declines, according to Moody’s Economy.com forecasts of Case-Shiller® Home Price Indices. Moody’s Economy.com has recently extended its forecast coverage to include county-level house-prices based on Case-Shiller data.
Moody’s Economy.com expects household credit conditions to continue weakening through much of the remainder of the decade, with another 5 million homeowners at significant risk of default during this period. This includes about one-half of the current 10.5 million borrowers with subprime (5.25 million), alt-A (4.5 million) or jumbo option ARM mortgages (.75 million) that are in significant negative equity positions.
Other types of consumer credit are also eroding, and problems will step up, according to Moody’s Economy.com. Credit card receivables are rising at close to a double-digit rate as homeowners unable to borrow against their homes are turning back to their cards as a source of cash. Card receivables are rising at close to 15% in California, 20% in Florida, and 30% in Nevada. Vehicle loans are also expected to suffer further erosion in loan quality through the remainder of the decade.
