TransUnion has just released the second update to its 2010 Payment Hierarchy study, which has been tracking the changing consumer debt repayment preferences in the post-Lehman world. It tells us that Americans are still far more likely to be current on their credit cards than on their mortgages, which has been the case for the past four years, as seen in the graph below.
However, it turns out that neither of these debt categories is Americans’ top concern. Being current on their auto loans was by a wide margin consumers’ top debt repayment priority in 2011, the new data tell us. Moreover, that was the case in all 50 states, although by varying degrees.
These latest results came as a surprise to many observers who expected that, once the recovery took hold, Americans would again make mortgages their top debt repayment priority, ahead of credit cards and auto loans. Well, that hasn’t happened and the new data seem to be telling us that it will not happen anytime soon.
The Data: Auto Loans Are Paid before Credit Cards and Mortgages
The results from TransUnion’s study are based on data collected in each quarter of 2011 from four million American consumers who had at the time at least one open credit card account, one open mortgage and one auto loan. The study measured the proportion of consumers who were delinquent by 30 days or more on one of these three debt categories, while being current on the other two. Here are the national averages:
- 9.5 percent were delinquent on an auto loan while being current on their credit cards and mortgages.
- 17.3 percent were delinquent on a credit card while being current on their auto loans and mortgages.
- 39.1 percent were delinquent on a mortgage while being current on their auto loans and credit cards.
The payment hierarchy was the same in all states but, unsurprisingly, it was most pronounced in places where the housing bubble grew largest. For example, here are the results for Florida:
- 6.1 percent delinquent on auto loans while current on credit cards and mortgages.
- 11.3 percent delinquent on credit cards while current on mortgages and auto loans.
- 50.0 percent delinquent on mortgages while current on credit cards and auto loans.
By contrast, the respective numbers for Texas, which didn’t have a big housing bubble, were 15 percent, 22 percent and 34.4 percent.
What Determines Americans’ Payment Preferences?
As the Florida / Texas comparison above shows us, there is a direct link between the fall in housing prices in the aftermath of the bubble’s burst and the shifting payment preferences. Tellingly, Florida and California, which experienced the biggest housing bubbles in the U.S., were the states where the trend began. TransUnion tells us that in both states the payment hierarchy shift to prioritizing credit cards over mortgages occurred two quarters earlier (Q3 of 2007) than it did at the national level.
Both in Florida and California the ratio of consumers delinquent on their mortgages while being current on their credit cards has fallen in 2011 from the 2010 peaks. Yet, the payment hierarchy shift has remained just as strong, because the ratio of consumers delinquent on their credit cards while being current on their mortgages has also fallen. So what are we to make of these data? Here is what Matt Komos, a co-author of the study, has to say:
It appears that the shift back to prioritizing mortgage payments ahead of credit cards — or auto loans — may only occur once the housing market has stabilized and begins its recovery and the unemployment situation shows significant improvement. Until that time, based on the last four years of data, it would seem that the current payment patterns will remain status quo.
So the “normalization” process will take years.
There is another way to illustrate the shift in consumer payment priorities in the U.S. The fact is that both mortgage and credit card delinquency rates have now fallen significantly below their post-crisis peaks. However, while credit card delinquencies are now at a historically low level (and keep falling), mortgage delinquencies are still very, very high by historical standards. The two graphs below drive the point home (source). First, mortgages:
And here is the credit card delinquency graph:
As you can see, mortgage delinquencies have a long way to fall before they catch up with credit cards.
Image credit: Etsy.com.