Mortgage Lending Standards – The Nerf Wars, Money Strong

We consume, therefore we are??

That was certainly the case this last long weekend as a determined mom cast about all over cyberspace in search of not one, not two, but three Nerf N-Strike Elite Tactical Vests. It’s so rare that anything not involving a screen captivates the littles. Hence the glee at seeing three young boys and half the neighborhood engaging in nonstop Nerf Wars at all hours of the day and night. Outdoors. The wars have escalated such that the soldiers must now be outfitted with gear to pack extra ammunition. The fruitless search for said vests, however, proved the backyard warring trend was anything but contained to a tiny hamlet in the middle of Dallas.

The quest began in benign fashion. Easy, breezy, Walmart.com appeared to have them for $29.99 apiece. Not so fast. The gigantic retailer’s out-of-stock advisory led to ToysRUs.com where quantities were limited to five units at $32.99 a pop though they were in stock…until they weren’t at checkout. The next search finally produced dividends at EntertainmentEarth.com (who knew?)…that is, until after entire checkout process was complete and fine print popped up that they were backordered indefinitely, for $35.99 each. Desperate, eBay was summoned but all 19 that had been available at $49.99 were sold out.

Pride and wits have prevented a final stop at Amazon.com where the starting price for the 12 remaining in the country starts at $74.50 and ends at $132.47. Each. Those who are willing to pay the ransom at the last bastion of supply and demand, a.k.a. Amazon Marketplace, validate the instant gratification economy the U.S. has become.

Tuesday’s news that the measly manufacturing sector had slid into contraction in November was largely shrugged off given 85 percent of the economy is services. That’s fair enough, though foolhardy as the factory sector tends to lead economic developments. Still, it’s the consumption portion of the GDP equation that most rankles. Recall that two-thirds of the biggest economy in the world consists of what we collectively buy.

An innocent enough headline highlighted how far households have journeyed to arrive at their current consuming state. A recent Wall Street Journal story, “Americans Opt to Save, Not Spend,” told a cautionary tale. U.S. consumers “socked away” so much of their income in October that the personal saving rate rose to a three-year high of 5.6 percent.

First things first. The Bureau of Economic Analysis (BEA) deducts payroll and income taxes from personal income to get disposable personal income, our take home pay. The BEA then nets out what we spend – everything from what we buy to the mortgage payment – to get an estimate of the saving rate. The final step involves dividing personal income by personal saving.

If you think the calculation skews the data to those who make lots of money, you’re right. The latest figures show that nearly half of U.S. workers don’t save one thin dime, mainly because they can’t and also make ends meet. Squaring the circle is the fact that the top 10 percent of earners save 10 percent or more while the top one percent save closer to 40 percent of their earnings.

The real question is how on earth the consumption-hooked economy has managed to grow at all in recent years, all things considered. Some historic perspective is needed about now.

To place October’s ‘alarming’ 5.6-percent figure into context, the rate averaged 9.8 percent from 1950-2000. Drilling down, today’s level is in line with the 5.5-percent average of the 1990s, but down markedly from the 1980s 8.6-percent and the 1970s 9.6-percent rates. By the same token, it’s well above 2006’s negative one percent rate, meaning people literally spent more than they earned and had to burn through savings or borrow to accomplish that task.

There are three other historic precedents of negative annual saving rates – 2005 and 1933 & 1932. The motivating factors behind the rare numbers, however, speak to how very much the country’s culture has changed. During the Great Depression, when one-in-four workers were unemployed, households had no choice but to break into their piggy banks to cover the cost of necessities.

In 2005 and 2006, the negative rate was driven by the easiest credit standards in recorded U.S. history. Millions of homeowners cashed equity out of their homes; the annualized withdrawal figure peaked at $700 billion in 2005. The amount of pseudo-wealth this generated amounted to between six and eight percent of disposable income during the housing boom heyday. Suffice it to say, this provided a huge boost to consumption and, most importantly, felt great.

What’s most unbelievable is that people managed to spend so much. Of course, that was then. Home equity withdrawal is a pittance of its former self and over 10 million homes have been lost to foreclosure. Ancient logic dictates that scarred Americans would have shunned debt in the aftermath of such financial carnage for many years.

Why then did consumer credit rise by an unprecedented $29 billion in September, the most since record keeping began in 1941? Why should we expect to see an equally robust figure when the October report is released on December 7th?

The media tells us that debt reflects confidence in the economy. But what if we’ve all been duped? What if we consume just because we can, just because the money is there for the taking?

The latest figures on household debt put total balances at $12.07 trillion. That’s still shy of the $12.68 trillion record hit in the third quarter of 2008. But the pace of credit growth — $355 billion per quarter – suggests the figure will be eclipsed early next year.

It can’t hurt that mortgage lending has finally picked up. But the real action has been outside the mortgage arena. Consumer credit outstanding is at a record $3.5 trillion and counting. Auto balances in the third quarter alone grew at a 12-percent rate and now eclipse $1 trillion. Sadly, a good number of these loans are going to households who can hardly shoulder the payments. Sound familiar?

Seabreeze Partners’ Doug Kass spent a full day last weekend cruising auto lots. His observation is telling:

“This experience put the extraordinarily liberal financing plans that are available into fresh focus. In fact, I’m being kind as some offers are flat out irresponsible.”

Meanwhile, student loans continue to gallop ahead and sit at $1.2 trillion in outstanding balances (not to worry, new policies and fresh efforts promise to excuse billions of dollars of federal student debt in the years to come). Credit cards remain the laggard class at $714 billion but growth in this category too has been stellar of late.

Economists shush-shush these outstanding figures reminding the masses that the cost to service household debt is hovering near all-time lows. Please. This argument lends new meaning to disingenuous. How is it possible that the cost to service debt be anywhere but rock bottom levels seven years into a zero-interest rate policy?

News that mortgage lending standards are loosening should be welcome. But home prices have been rising for 44 straight months. It would almost be a blessing in disguise if new entrants to the housing market continued to be denied access to mortgages if it meant preventing them from buying at what appears to be a top in the making.

Perhaps what’s missing is a strong enough voice urging Americans to show more restraint than we have in generations. Maybe a double-digit saving rate wouldn’t be such a bad thing after all. Granted, it wouldn’t be pleasant in the beginning. Sacrifice never is.

But the fact is, far too few Americans have saved enough for retirement. The Center for Retirement Research found that in 2013, the average retirement assets of those aged 50-59 were just $110,000. With the stock market up, that figure has no doubt improved since then, but two glaring details require consideration.

First, a typical retiree needs at least $250,000 saved to generate $10,000 a year in income. The hope is this is sufficient to augment what little they can expect from Social Security. More to the point, nearly every investment inside these retirement accounts is at risk of suffering major losses given asset class valuations.

A recent Fidelity Investments study found that 11 percent of 401(k) account holders aged 50-54 had all of their assets in the stock market. Other disturbing statistics followed indicating many will be forced to work well past retirement age out of necessity.

At the risk of piling onto a busy holiday season agenda, maybe we should all plan to shop a little less and put in some quality reading time. Not sure which title to choose? Try former Bank of England’s Lord Adair Turner’s new book, Between Debt and the Devil. The basic premise of the book is that most credit is not needed for economic growth, that it in fact drives malinvestment and foments boom and bust cycles.

It certainly feels like that’s the roller coaster ride the U.S. economy has been on since household debt took off for the races in the 1980s. Does anyone recall the young, upwardly mobile professionals who first embraced debt en masse, who flaunted their gold cards and BMWs they could ill afford? Is it any coincidence that this same Baby Boomer generation is so ill-prepared for retirement?

Name a yardstick, any yardstick – margin debt, mergers & acquisitions, high end home sales, fine art auctions, household net worth, and of course, hard-to-procure Nerf N-Strike Elite Tactical Vests. It’s plain as day we’re in a huge boom right now. What’s the hardest part about not falling victim to the bust cycle that inevitably follows? The answer to that is easy. Pigs get fat. Hogs get slaughtered.

Mortgage Lending Standards - The Nerf Wars